Public Bill Committee

[Mr. Jim Hood in the Chair]

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)

Jimmy Hood: When we adjourned, the Financial Secretary had just given way to an intervention from the hon. Member for Wellingborough.

Clause 35

Tax treatment of financing costs and income

Question (this day) again proposed, That the clause stand part of the Bill.

Peter Bone: I am grateful to the Minister for giving way over such an extended period. We were talking about the different dates: 1 July and 1 January. The Minister had linked the two issues of the treatment of dividends and the debt cap. I wondered why the dates had not been coterminous. The subsequent point about 1 July is that this will come into effect before the Bill is enacted. If we get past that date and the Government call a general election, where does that leave people? Is it law or not?

Stephen Timms: Welcome back, Mr. Hood. I can reassure the hon. Gentleman that I do not expect that that will happen. But the Bill will not become law until it secures Royal Assent. He asked why we do not have the same date for the implementation of dividend exemption and the new debt cap requirement. It was the original intention, but in our discussions with businesses there was a strong sense that it would be helpful if there was a period between the two. They will undoubtedly want to make some changes and introducing the six months between the two gives a period of grace that enables them to do that. That has been widely welcomed. It is one of the improvements that we have made as a result of the consultation over the last few months.
I was answering a number of questions raised by the hon. Member for Fareham about the thinking behind the changes that we have made. As he said, there would have been a number of ways to tackle the issue that we are dealing with in the schedule. In terms of moving towards a territorial tax system, one view would be that as a matter of principle, interest to fund foreign equity investment should not be relieved when the dividends from those investments are exempt. Taking that view would suggest that dividend exemption should be accompanied by strict interest allocation or a limitation of interest for outward investment.
Either of those would have a very big impact on multinational companies, particularly on UK-headed groups. We discussed them both with businesses. Both were disliked, particularly interest allocation and the associated complexity and administrative burden that accompanies it, as has been found in the operation of that arrangement in the United States. Companies were very keen that we should not go down that road. So the debt cap measure is a less far-reaching but principled measure to accompany dividend exemption.
The hon. Gentleman suggested that another way might have been to tighten the thin capitalisation rules. That is where, typically, a UK subsidiary of a foreign multinational is funded with too little share capital and too much debt, thereby attracting a higher tax allowance than would otherwise be the case. That is countered at the moment using the UK transfer pricing rules which adjust the profits of a company that is thinly capitalised to reflect the profits it would have made if it had been capitalised in accordance with the arms length principle. A tightening of the UK rules to counter cases where there is excessive debt in the UK would mean abandoning the arms length principle. Instead we could have looked to counter thin capitalisation using different rules, but the alternative methods would have an impact on many more cases than the debt cap measure does.
In the end, we concluded that this is a principled and effective approach that deals with the problem. It is a clear principle. It is readily understood. In December, following the pre-Budget report, we issued draft legislation on the foreign profits package, so that people could see our intentions. There were concerns and lots of discussions arose.
At the beginning of April, Her Majestys Revenue and Customs published a technical note setting out current thinking on the debt cap with high level design changes, which have been welcomed. When the Finance Bill was published at the end of April, large parts of the debt cap legislation had been revised, but there were areas that required more time to ensure that the proposals were appropriate, so they were not in the Bill. There have been further discussions with interested parties since then. That is the background to the Government amendments to schedule 15.
The hon. Member for Farehams final question was about the gateways for outbound investors for UK-headed groups. He is right; we had hoped to have more than one gateway to keep administrative burdens on business as small and as light as possible. He anticipated part of my answer: throughout the package, as I have mentioned, we have had to take European Union legal requirements into account, and consequently we could only make one gateway available. However, the improvements to the debt cap design, particularly the switch from net debt to gross debt, exclude more groups from the debt cap anyway. Other changes reduce the administrative burden on any group that has to comply with the rules.

Mark Hoban: Is there a workaround that HMRC could introduce? As I said in my remarks, a purely UK company would still have to work out whether it passed the gateway test even though it had no overseas parent or overseas external debt. Is there guidance? I hate asking for HMRC guidance and I argued against it last year. Is there a pragmatic solution that would say that a UK-only group need not go through the calculations set out in the gateway test?

Stephen Timms: We have taken steps to reduce to a minimum the administrative burden that any group will have to assume to meet the requirements. Certainly, we are open to doing what we can to help. I do not want to give the impression that there will not be an administrative burden; there clearly will be, but we have taken the steps that we can to keep it to a minimum.

Peter Bone: To be clear, is the Minister saying that if it were not for EU regulations, things would be better, more efficient and less bureaucratic for British companies?

Stephen Timms: No, that is not what I was saying. I am aware that the hon. Gentlemans party is heading rapidly to the outer extremes of the European Parliament. That is not a sensible or wise view. It is important that the arrangements are safe from challenge under European law, which these are. We have designed them carefully with that in mind.

Mark Hoban: I do not want to extend the debate unnecessarily, but a philosophical point arises from the discussion that we have had on the previous clause and schedule and from other aspects of Finance Bills in recent years. The Marks and Spencer case, for example, was another case in which EU law about freedom of movement and freedom of establishment principles came into play. Have the Government looked more broadly at how aspects of UK tax law need to be reformed to take into account the growing trend of businesses to consider opportunities to arbitrage UK tax and the broader principles underpinning EU laws generally?

Stephen Timms: No, there is no general review going on, although we increasingly have to take account of issues that might be raised by European law when we design our legislation, as we have in this case.
Going back to the hon. Gentlemans point about a light touch for UK companies, there could be a danger of that kind because it appeared that UK companies and EU companies were treated differently. We might have run into difficulties on that and we need to ensure that we do not. As he may have been suggesting, from time to time, issues that are raised by court decisions require us to look again at features of the legislation.
I hope that I have satisfied the Committee that the clause is an appropriate measure to sit alongside the dividend exemption that we debated before lunch and I commend it to the Committee.

Question put and agreed to.

Clause 35 accordingly ordered to stand part of the Bill.

Schedule 15

Tax treatment of financing costs and income

Stephen Timms: I beg to move amendment 105, in schedule 15, page 149, line 20, at end insert
(4A) Part 5A contains rules connected with tax avoidance..

Jimmy Hood: With this it will be convenient to discuss Government amendments 116, 138, 139, 151 to 153 and 157.

Stephen Timms: In my remarks a few moments ago, I indicated the background to this series of Government amendments. I apologise to you, Mr. Hood, and to the Committee, because I will need to take a little time to explain what is happening and the reasons for the measures.
The debt cap principle is simple in concept, as we discussed. It requires comparison of the interest and other finance expense payable in the UK by a groups net interest-paying companies, which is referred to as the tested expense, with the consolidated gross finance expense payable by the worldwide group, which is referred to as the available amount. When the tested expense amount exceeds the available amount, the excess is disallowed for tax purposes. If other UK group companies have net interest receipts, the equivalent amount of those receipts becomes non-taxable, to prevent, effectively, double taxation.
The legislation is targeted at abuse of generous UK rules on deductibility of interest by multinational businesses. For that reason, it applies only to large businesses and companies for which the net interest expense exceeds £500,000, so many companies will not need to consider the debt cap legislation at all.
The debt cap can apply to both inbound and outbound investors, but it can also count as exploitation of the interest relief rules when upstream loans are made to the UK parent by its subsidiaries. Not all upstream loans are offensive, as we were saying before lunch, but some are tax-driven, with the interest payment removing profits from the scope of UK taxation and with the interest receipt arising in a company where it is effectively either not taxed or taxed at a low rate.
The legislation contains a number of exclusions which, taken with the other changes that we have made, ensure that the debt cap is carefully targeted. I will go into some of those in more detail, but I shall first list them. First, the financial services exclusion recognises that the different role of debt in financial groups is being introduced by amending the Bill. Secondly, there is a group treasury exclusion, which applies where group companies lend money to a UK group treasury company and that company then lends on the money at profit. Thirdly, there is a short-term debt exclusion, which recognises that short-term upstream loans are not likely to be tax-driven but are made to enable groups to manage their short-term cash position better, for example by allowing a group to operate a cash pooling arrangement to reduce banking costs.
Fourthly, there are exclusions for companies within the ring-fenced oil regime, the shipping tonnage tax regime and the real estate investment trust regime, as the regimes already address the taxation of those activities. Finally, there are exclusions to deal with payments of finance expense by trading subsidiaries to their UK parent where that is a charity or some other exempt body.
Two of the exclusions deserve a bit more explanation. The financial services exclusion applies when substantially all of a groups income or the income of UK members of the group derives from a particular financial services activity. Banks, for example, borrow at interest so they can lend to their customers, and it would be inappropriate to apply the debt cap to them. As I said in my letter of 30 April, the financial services exclusion was not included in the Bill at publication, as we wanted more time to ensure that our proposals were effective and discuss them with those affected. The exclusion is now being introduced by way of Government amendments.
The group treasury exclusion is appropriate because in cases where group companies provide internal lending facilities for other members of the group and manage cash pooling arrangements on behalf of the group, the facilities provided by the group treasury company generate UK-taxable profits rather than removing profits from the scope of UK taxation. The exclusion is therefore appropriate.
Schedule 15, as we were discussing, includes a gateway test. If it is satisfied, a group need not consider the application of the debt cap rules any further for the accounting period concerned. I should mention in passing that the legislation requires anti-avoidance rules to deter companies from entering into or being party to schemes that seek to prevent the operation of the debt cap. The rules were not included in the Bill on publication, again so that we could have more time for discussion. They, too, are now being introduced by way of Government amendments.
Earlier, we discussed the implementation date for the debt cap. As I said, after discussions with business, the debt cap legislation will apply to accounting periods beginning on or after 1 January 2010. I should make that point clear: it applies to accounting periods starting on or after that date. That means that we have removed the need for companies to apportion the results of an accounting period, as would be required if the debt cap legislation simply applied with effect from a particular date. If it applied from 1 January 2010, any accounting period straddling that date would require apportionment, which would be complicated. We have avoided that difficulty. The implementation date also provides an interval following the introduction of dividend exemption that enables groups to pay up dividends and then unwind upstream loans, and it allows businesses time to become familiar with the legislation.
Our amendments to the design of the debt cap, which I am about to explain in more detail, will result in a simpler regime with greater scope for business to avoid the impact of the debt cap. Without anti-avoidance rules, groups that would pay additional corporation tax as a result of the debt cap might rearrange their borrowings to avoid the rules. Although the same borrowings might remain in substance, the form of the borrowing and other arrangements could reduce the UK net finance expense amounts or increase the worldwide figure of gross finance expense.
The anti-avoidance rules are split into three parts. The first part counters schemes intended to arrange for the group to satisfy the gateway test. The second part counters schemes intended to secure that the available amount, the worldwide group gross finance expense, is greater than it otherwise would be; or that the tested expense amount is less than it would otherwise be; or that the amount of financing income exempted for UK group companies is greater than it would otherwise be. It also counters schemes where a UK company is a beneficiary of the scheme but is not actually a party that has transactions that make up the scheme. Again to ensure that the debt rules are compliant with EU law, the debt cap allows UK companies to exempt financing income received from another group company resident in another part of the European economic area, where that company is subject to a disallowance or that payment in its own country of residence. The third part of the anti-avoidance rules ensures that the amount of financing income that can be exempted by a UK company cannot be increased as a result of an avoidance scheme.
Each of these anti-avoidance rules incorporates a purpose test, providing that the rules apply only where the main purpose, or one of the main purposes, of the scheme is to secure a result that frustrates the intention of the debt cap rules. The scope of the schemes potentially caught by the rules is necessarily wide. The alternative would be to attempt to define the schemes that might be put in place to frustrate the debt cap rules, but it would be very difficult to anticipate all the potential avoidance schemes. The approach we have taken is the right one, but we recognise that some schemes will feature arrangements that are not designed to frustrate the debt cap rules. We have addressed that by providing that if the profits of the UK members of the group are greater or the losses lower than they would be if the arrangements were not in place, the anti-avoidance rules will not apply.
HMRC will be available to define, by regulation, schemes that consist of particular types of arrangements or schemes bearing particular hallmarks that will not be subject to the anti-avoidance rules. HMRC expects to develop those in discussion with companies. The new targeted anti-avoidance rules for the debt cap are inserted by way of a new part to schedule 15, requiring Government amendment 105 to update the overview in part 1 and Government amendment 116 to insert the new part.
The provisions as published already contain a targeted anti-avoidance rule, at paragraph 68(7) and (9), to prevent a UK group company from being artificially removed from the scope of the debt cap. I have mentioned that such a scheme will be caught by rules introduced through Government amendment 116. That allows for the existing rule to be removed, and Government amendments 138 and 139 achieve that.
In response to calls from business, the debt cap now applies to a group for its first accounting period beginning on or after 1 January 2010. We would expect a group with an accounting period due to end on 31 December 2009 to apply the debt cap measures with effect from 1 January 2010. However, such a group could shorten its accounting period by one day to 30 December 2009 and the debt cap would not apply till the following accounting period, which starts on 31 December 2009. We want to stop such forestalling activity. The change to the commencement date made to accommodate businesses therefore requires us to introduce Government amendments 152 and 153 to counter such activity. The amendments move the commencement day for the debt cap rules forward where a group changes its accounting period and the main purpose, or one of the main purposes, of doing so is to delay the application of the debt cap.
On Government amendment 157, consequential changes are required to prevent double taxation. The debt cap disallows some finance expense where the net finance expense of the UK members of a group exceeds the groups gross external finance expense. In some cases, the finance expense disallowed may be interest payable to an overseas subsidiary of a UK group company that is taxable on the UK parent company under the controlled foreign company rules. To prevent effective double taxation, Government amendment 157 adds new rules to the CFC legislation that will allow a group to apply for otherwise taxable CFC profits that are apportioned to a UK group company to be consequentially reduced.
Government amendment 151, on UK transfer pricing rules, applies the arms-length principle so that finance expense payable by a UK group company to another group company can be claimed as a deduction only if it is the amount that would have been payable to a third party. Equally, financing income receivable by a UK group company from another group company must reflect the amount that would have been receivable if it had come from a third party.
The debt cap can result in finance expense being disallowed and financing income exempted. It is possible in some cases that the transfer pricing rules could reinstate such adjustments. To address that problem, we need to make clear that the debt cap rules operate after any necessary adjustments under the transfer pricing rules have been made. Government amendment 151 makes a change to the transfer pricing rules that makes the primacy of the debt cap rules explicit.
I apologise to the Committee for having taken up so much time with that explanation, but I hope that I have made clear our reasons for tabling the new anti-avoidance provisions at this stage. They have been widely discussed and considered, and I hope that the Committee will be happy to accept the Government amendments.

Mark Hoban: I am grateful to the Minister for his explanation of the amendments and the general background. I wish to put one point on record at the start. It is a complaint widely voiced by professional advisers, who are concerned about the raft of amendments being tabled at this stage. I understand that some were circulated in draft form in the middle of last week, but they were tabled formally only on Thursday. A number of people to whom I have spoken over the past few days expressed concern that they have not necessarily got to the bottom of the changes, and that further issues may need to be resolved. It is a pity that we have to discuss the amendments so soon after their publication. I suspect that we may see further amendments being made on Report, or even that the matter will have to be revisited in next years Finance Bill, as people work their way through some of the changes.
I shall speak first about the anti-avoidance measures. The Minister says that they are targeted measures, but there is some concern they are not targetedthat they are instead quite broad in their approach. The Minister said that the Treasury wanted to avoid being too specific, so that people did not try to get around detailed provisions, but I wonder whether we have gone to the other extreme. What sort of activities can businesses undertake to reduce their tax charge that will be deemed reasonable by HMRC? One expects taxpayers, when confronted with a higher tax bill as a consequence of such provisions, to take steps to reduce their tax bill. It is something that most of us would do, and I believe that companies will look to restructure their external debt to reflect the provisions.
A number of issues create the backdrop to the change. The fact that the gateway test is much narrower than anticipated is a problem, as is the fact that the net receivables of a company cannot be offset against net debt in other group companies. I believe that people would try to structure their activities so that they could be netted off in the same company if no exemption were available to match those amounts in the group as a whole. Would HMRC expect to see and be happy with that level of restructuring in the run-up to commencement, with tidying up going on to get net receivables under the maximum debt in the same company in order to enable that offset?
The other aspect is the exemptions referred to by the Minister in the anti-avoidance clause to be inserted under Government amendment 116. New paragraphs 38B to 38E will prevent groups from structuring their financing so as to minimise any disallowance that they could suffer as a result of applying the debt cap legislation, unless the arrangement meets the definition of an excluded scheme. In trying to get to that point, however, some of the decisions that businesses need to review require a group to look at some hypothetical comparator transactions and deduce which of them it would be more likely to undertake in the absence of the debt cap rules and then calculate the test of debt expense, the available amount, the test of income amount and the groups profits chargeable to tax that would arise if the hypothetical transaction had taken place. That is covered in new paragraph 38D(2)(b), which says:
instead, anything that is more likely than not would have been done or not done had this Schedule not had effect in relation to the relevant period of account, was done or not done.
That may be perfect drafting from a parliamentary draftsmans point of view, but I am not entirely sure what would be required unless someone explained it to me. However, there appears to be a test of looking at how a company might have acted if the rules had not been in place. I question whether the anti-avoidance measures are sufficiently opaquesorry, I mean sufficiently transparent, although they are certainly opaqueto enable businesses to take reasonable decisions on how to restructure their affairs legitimately to take the new rules into account. There may be a raft of potential comparative transactions that a business could undertake, so how can a business prove to HMRC that it can satisfy the provisions outlined in new paragraph 38D(2)(b)? I think that the measure will cause some problems to business.
We need to think about quite carefully the breadth of the measure, including what sort of transactions it might inadvertently capture. For example, there might be a scheme whereby an inbound investor is debt financing a machinery replacement programme in its UK subsidiary to increase production and thereby increase UK profits. However, if an investor decides to reduce the amount of financing that is to be provided so that the cost of capital is not increased by a disallowance under the debt cap, conditions A and B of new paragraph 38B might well have been met, because one of the investors main purposes was to ensure that there was no disallowance under the debt cap, and UK profits would be lower than they would otherwise have been because less machinery is in place and consequently production and profits are not as high as they would have been if the full replacement programme had been implemented.
We assume that such a transaction is not the target of the anti-avoidance provisions. It is not an unreasonable transaction to undertake, but it would appear to satisfy conditions A and B of new paragraph 38B, so one would assume that it would fall within the definition of an excluded scheme. Again, the breadth of the measures is causing part of the problem. The definition of an excluded scheme is actually quite important in establishing what is intended to be targeted by the anti-avoidance provisions and what is not intended to be targeted.
We understand that the excluded schemes will appear in secondary legislation. However, until we have a chance to look properly at that secondary legislation, which is being consulted upon, it is very hard to know what schemes will fall inside or outside the anti-avoidance provisions of the Bill. This is an important issue, because a number of groups will seek to use the period between now and the commencement of the regime to look at the nature of their activities, to decide what their financial arrangements should be and to see whether they may be caught by what appears to be quite a broad-brush anti-avoidance rule.

Stephen Timms: There has been a great deal of discussion with businesses over the past couple of years about everything that we are considering this afternoon, including how anti-avoidance should be handled. I do not want the Committee to get the impression that this measure has come out of nowhere, hence my statement that there has been a lot of discussion leading up to this point in the process.
The anti-avoidance rules have indeed been designed with a wide scope. That is to ensure that all schemes designed to frustrate the intention of the debt cap rules are caught. I made the point earlier that the alternative would have been to identify specific schemes that would be caught by the rules, but that would have run the risk of not catching schemes that nobody had thought of, or because specified schemes were changed before being used. However, the anti-avoidance rules contain filters that will ensure that they apply only to those schemes that are intended to frustrate the debt cap rules.
The hon. Member for Fareham asked how a company is supposed to establish the most likely outcome if the anti-avoidance rules apply, and what its profits ought to be. In many cases it will be straightforward to work out the most likely outcome. For example, when the avoidance is targeted at increasing the gross consolidated finance expense of the group while leaving the borrowing costs associated with that scheme more or less unchanged, the most likely alternative outcome will be to ignore the increase in those expenses. I do not know whether the hon. Gentleman will find this reassuring, but HMRC will in due course publish guidance to help to explain the factors that need to be taken into account and assessed when establishing the most likely alternative outcome. As it develops the guidance, HMRC will certainly talk to businesses about that, and in cases of real difficulty, which I think will be rare, it will be happy to discuss the most likely outcome with the group.
We cannot allow set-off between group companies because that would not be EU-law compliant. However, putting receipts of interest into the company with expense is not offensive, because the company then does not have so much interest expense to claim as a deduction.
As I said, we will publish detailed draft guidance before the Bill receives Royal Assent, and will discuss it with businesses. That will help us to come up with specific examples that should not be caught, which might be helpful in some of the situations that the hon. Gentleman has in mind.

Mark Hoban: I am not hugely reassured by the statement that HMRC will produce guidance. There were various attempts during last years Finance Bill to get HMRC to produce guidance, which effectively would have enabled people to be taxed by legislation but untaxed by guidance. There is a lot of concern about that approach among tax professionals more broadly. They are concerned that guidance does not have statutory force, does not necessarily have to go through a proper consultation process, and offers less security to taxpayers than primary or even secondary legislation.
The Minister should not be in any doubt that people will be content if guidance is published, but it is better to get primary and secondary legislation right than to tax people by guidance. Will he reassure the Committee that regulations will be introduced to define excluded schemes and that the guidance will give the context of what schemes are deemed to be excluded? It might give a bit more certainty to taxpayers if the guidance is simply an elaboration of what is in secondary legislation, rather than something that exists independent of it.

Stephen Timms: We will publish the detailed draft guidance before Royal Assent and discuss the content with business. HMRC will consult with business to consider particular schemes that are not intended to frustrate the debt cap rules. It will then consider whether such a scheme can be defined by, for example, particular hallmarks that characterise a scheme, which we can set out up front by outcome or by other criteria, and then publish draft regulations for comment. The intention is to achieve a progressive process with excluded schemes added over a period.

Peter Bone: On the general principle of specifically outlawing schemes rather than having a wider catch-all, is it not better to have specifically outlawed schemes, so that taxpayers know where they stand? Is it not the role of Government to outwit the accountants each year? What will happen is that accountants will look at the provision and try and get round it, and we will be back here again next year outlawing schemes in the next Finance Bill. By specifying schemes, one can at least argue with some certainty, rather than going off to tribunals or court cases.

Stephen Timms: I think the hon. Gentlemans argument actually supports the approach that we have taken. He is absolutely right: some very ingenious people will no doubt try to find a way round some of the provisions. However, if the approach we took was to try to work out what kind of schemes might be dreamt up and then list them all or set them all out in the legislation, that would be an invitation to someone to think of a slightly different version, or to come up with something new. It is therefore better to design the anti-avoidance rules as we have done, with a wide scope, so that all schemes that are designed to frustrate the intention of the debt cap rules are caught. He is right about the ingenuity that will be applied, but I think that the conclusion he draws is not correct. It is better to have the wide scope that allows us to deal with whatever is invented.

Amendment 105 agreed to.

Stephen Timms: I beg to move amendment 106, in schedule 15, page 150, line 1, at end insert
(1A) But a period of account that is within sub-paragraph (1) is not a period of account to which this Schedule applies if the worldwide group is a qualifying financial services group in that period (see paragraph 6A)..

Jimmy Hood: With this it will be convenient to discuss Government amendments 110 and 150.

Stephen Timms: I can be a bit briefer with this group of amendments, as I have already set out the aim of the debt cap legislation. I mentioned that some businesses cannot operate without the use of debtfor example, banks borrow from their depositors to lend on to customersand the debt cap has never been intended to apply to businesses for which debt is integral to what they do. The draft clauses published in December contained exclusions for financial business where debt was an integral part of that business, but subsequent discussions established that those rules, as set out at that time, would have been very difficult to operate in practice.
In my 30 April letter, we explained to the financial services industry why the Bill would not exclude this exclusion on publication. We have been working with business to develop workable solutions since then. The new financial services exclusion rules work by excluding a group as a whole from being subject to the debt cap where substantially all of the groups income, or the income of UK members of the group taken together as a mini consolidated group, is derived from qualifying activities. In that context, substantially all will be taken to mean around 90 per cent. Qualifying activities are lending business, insurance businesses and trading in financial instruments. The rules recognise the need for flexibility so that they can be applied by financial services groups in a straightforward way. The rules allow groups to take account of other types of income generated by way of the qualifying activities and deal with cases in which some of those activities might produce losses. The amendments introduce the financial services exclusion in a form that delivers the intended policy, while rightly excluding financial services businesses. It is also practical for the industry.

Mark Hoban: The Minister is right that these are important amendments. Last year, when I discussed the debt cap with those in the banking sector, this was identified as being an important issue to get right, because of the nature of their financing. I want to raise some issues that have been brought to my attention in the relatively short time since these clauses were published. Some of them have been discussed with the Treasury already.
The first issue relates to qualifying activities. To qualify for the exemption, all or a substantial amount of a groups income must be aimed at qualifying activities. The Minister said that that means 90 per cent. of the groups income must be in a qualifying activitya proportion used elsewhere, I think. However, that means that groups with a combination of qualifying and non-qualifying activities might have a problem. Let us consider how some businesses in the financial services sector are currently developing. For example, retailers are increasingly moving into financial services. The financial services income might constitute a relatively small proportion of a groups total income, which means that it would not qualify under this exemption because neither all nor a substantial part of its income will derive from a qualifying activity. The vast majority will come from retailing, selling petrol or whatever. This provision might place an extra burden on groups seeking to diversify into financial services and act as a barrier, or a further disincentive, to them doing so.
I understood that, at one stage, the Treasury or HMRC were considering an exemption that would enable them to ring-fence sub-groups wholly engaged in qualifying activities as a means of getting around this particular issue. I would be grateful if the Minister could explain why that route has not been pursued and why the level has been set at such a high level of 90 per cent. I hope that this does not, as has been suggested, take us back to our old friend EU rules. My first concern, therefore, is about what happens with hybrid groups. Can the rules be amended to reflect the diversity of some groups involved in some financial services and other activities?
The second concern relates to the treatment of insurance premiums. The Minister will be aware that premiums on investment contracts will be accounted for in a groups balance sheet, rather than its income statement. Will those premiums be included in the gross income test under proposed new paragraph 6G(3)(B)? My understanding is that that point has been made and accepted by HMRC but is not reflected in the drafting of the amendment.
My second point on insurance premiums relates to the way in which they are disclosed in sets of accounts. Looking at the gross income for the debt cap test, will the Treasury expect insurers to report their premiums gross of reinsurance premiums, as that would be the appropriate measure for discerning the gross income test? As I understand it, as a matter of presentation several insurers show their turnover net of reinsurance premiums but disclose by way of note the gross premium. Could the Minister clarify how insurance companies will be able to calculate their gross income? The substantive point that concerns me at present is the question of how the exemption for financial services will take into account those groups whose financial services activity is perhaps a significant element but nowhere near the 90 per cent. test the Government have set out in the schedule and in the amendments.

Stephen Timms: I will deal first with the 90 per cent. limit and the substantial requirement. As the hon. Gentleman has said, that proportion is referred to elsewhere. It is needed is ensure that the exclusion is not treated as a state aid under EU rules. Some groups could well be in the position he described by essentially having a retailing business, but also an identifiable finance arm. When groups are in that position, it is possible that the whole group will be excluded through the application of the gateway test. Therefore, we took the view that introducing rules to deal with such cases in the legislation would be pretty complicated if we were to ensure that those rules were not then used for avoidance purposes. It is likely that no such groups will have to apply the main rules, so we do not think that there is a need to introduce additional rules.
With regard to income from insurance premiums taken as income that is gross before any reinsurance or net after reinsurance, for the purposes of calculating the trading income and income from qualifying activities the income is taken as gross, before any premiums ceded in respect of reinsurance. On the question of what happens if income is not normally reported as income in the income statement profit and loss account but is taken to the balance sheet, for example with premiums from investment contracts, the rules refer to income that is accounted for as such under accounting practice or principles where amounts receivable have the nature of income but for particular insurance accounting purposes are taken to the balance sheet. Those amounts will be treated as income for the purposes of applying the financial services exclusion rules.
Going back to the hybrid point, and the question of whether we could ring-fence sub-groups, that would require very complicated rules to achieve that and also to ensure that the exclusion was not exploited by groups for whom it was not intended. That is the reason we have not set out rules to ring-fence finance sub-groups.

Amendment 106 agreed to.

Stephen Timms: I beg to move amendment 107, in schedule 15, page 151, line 10, leave out finance income payable and insert liabilities.

Jimmy Hood: With this it will be convenient to discuss Government amendments 108, 109 and 111 to 113.

Stephen Timms: The gateway test we mentioned is a comparison of specific amounts of debt and cash and loan receivables from balance sheets of the UK members of a group and of the group itself. Each figure is the average of the opening and closing balance sheet figures. If the measure of total net debt of the UK members of the group that themselves have net debt is less than 75 per cent. of the gross debt of the group, the group does not have to apply the rest of the debt count rules for that accounting period. If a UK company has net debt of less than £3 million, it is not included in the calculation of UK net debt either.
In making the comparison, the terms that define liabilities and receivables in respect of finance leases do not work as intended. Amendments 107 to 109 put that right.
In some circumstances groups prepare accounts in a currency other than sterling, so the gateway test can be applied by reference to a groups functional currency rather than sterling. Amendments 111 to 113 in the grouping address how, in that case, the £3 million de minimis is translated to the functional currency.
The amendments ensure that the gateway test works as intended in those cases in which a group is involved in financial leasing businesses and where a group has adopted a functional currency other than sterling.

Amendment107 agreed to.

Amendments made: 108, in schedule 15, page 151, line 19, leave out finance income receivable in respect of and insert
net investments, or net cash investments, in.
109, in schedule 15, page 151, line 38, leave out finance income payable and insert liabilities.
110, in schedule 15, page 152, line 28, at end insert

Qualifying financial services groups
6A (1) The worldwide group is a qualifying financial services group in a period of account if the trading income condition
(a) is met in relation to that period, or
(b) is not met in relation to that period, but only because of losses incurred by the group in respect of activities that are normally reported on a net basis in financial statements prepared in accordance with international accounting standards.
(2) The trading income condition is met in relation to a period of account if
(a) all or substantially all of the UK trading income of the worldwide group for that period, or
(b) all or substantially all of the worldwide trading income of the worldwide group for that period,
is derived from qualifying activities (see paragraph 6B).
(3) In this Part, in relation to a period of account of the worldwide group
UK trading income means the sum of the trading income for that period of each company that was a relevant group company at any time during that period (see paragraph 6F);
worldwide trading income means the trading income for that period of the worldwide group (see paragraph 6G).

Qualifying activities
6B In this Part qualifying activities means
(a) lending activities and activities that are ancillary to lending activities (see paragraph 6C),
(b) insurance activities and insurance-related activities (see paragraph 6D), and
(c) relevant dealing in financial instruments (see paragraph 6E).

Lending activities and activities ancillary to lending activities
6C (1) In this Part lending activities means any of the following activities
(a) acceptance of deposits or other repayable funds;
(b) lending of money, including consumer credit, mortgage credit, factoring (with or without recourse) and financing of commercial transactions (including forfeiting);
(c) finance leasing (as lessor);
(d) issuing and administering means of payment;
(e) provision of guarantees or commitments to provide money;
(f) money transmission services;
(g) provision of alternative finance arrangements;
(h) other activities carried out in connection with activities falling within any of paragraphs (a) to (g).
(2) Activities that are ancillary to lending activities are not qualifying activities for the purposes of this Part if the income derived from the ancillary activities forms a significant part of the total of
(a) that income,
(b) the income derived from lending activities of the worldwide group in the period of account.
(3) In sub-paragraph (2) income means the gross income or net income that would be taken into account for the purposes of paragraph 6A in calculating the UK or worldwide trading income of the worldwide group for the period of account.
(4) The Commissioners may by order
(a) amend sub-paragraph (1), and
(b) make other amendments of this paragraph in consequence of any amendment of sub-paragraph (1).
(5) In sub-paragraph (1)(h), and in the references to ancillary activities in this paragraph and paragraph 6B(a), activities includes buying, holding, managing and selling assets.
(6) In this paragraph alternative finance arrangements has the same meaning as in Chapter 6 of Part 6 of CTA 2009.

Insurance activities and insurance related activities
6D (1) In this Part insurance activities means
(a) the effecting or carrying out of contracts of insurance by a regulated insurer, and
(b) investment business that arises directly from activities falling within paragraph (a).
(2) In this Part insurance-related activities means
(a) activities that are ancillary to insurance activities, and
(b) activities that
(i) are of the same kind as activities carried out for the purposes of insurance activities,
(ii) are not actually carried out for those purposes, and
(iii) would not be carried out but for insurance activities being carried out.
(3) Sub-paragraph (2) is subject to sub-paragraph (4).
(4) Activities that fall within sub-paragraph (2)(a) or (b) (the relevant activities) are not insurance-related activities if the income derived from the relevant activities forms a significant part of the total of
(a) that income,
(b) the income derived from insurance activities of the worldwide group in the period of account.
(5) In sub-paragraph (4) income means the gross income or net income that would be taken into account for the purposes of paragraph 6A in calculating the UK or worldwide trading income of the worldwide group for the period of account.
(6) In this paragraph
activities includes buying, holding, managing and selling assets;
contract of insurance has the same meaning as in Chapter 1 of Part 12 of ICTA;
regulated insurer means a member of the worldwide group that
(a) is authorised under the law of any territory to carry on insurance business, or
(b) is a member of a body or organisation that is so authorised.

Relevant dealing in financial instruments
6E (1) In this Part financial instrument means anything that is a financial instrument for any purpose of the FSA Handbook.
(2) For the purposes of this Part, a dealing in a financial instrument is a relevant dealing if
(a) it is a dealing other than in the capacity of a broker, and
(b) profits or losses on the dealing form part of the trading profits or losses of a business.
(3) In this paragraph broker includes any person offering to sell securities to, or purchase securities from, members of the public generally.

UK trading income of the worldwide group
6F (1) This paragraph applies in relation to paragraph 6A for calculating the UK trading income of the worldwide group for a period of account.
(2) The trading income for that period of a relevant group company is the aggregate of
(a) the gross income calculated in accordance with sub-paragraph (3), and
(b) the net income calculated in accordance with sub-paragraph (4).
(3) The income referred to in sub-paragraph (2)(a) is the gross income
(a) arising from the activities of the relevant group company (other than net-basis activities), and
(b) accounted for as such under generally accepted accounting practice,
without taking account of any deductions (whether for expenses or otherwise).
(4) The income referred to in sub-paragraph (2)(b) is the net income arising from the net-basis activities of the relevant group company that
(a) is accounted for as such under generally accepted accounting practice, or
(b) would be accounted for as such if income arising from such activities were accounted for under generally accepted accounting practice.
(5) Sub-paragraphs (3) and (4) are subject to sub-paragraph (6).
(6) In a case where a proportion of an accounting period of a relevant group company does not fall within the period of account of the worldwide group, the gross income or net income for that accounting period of the company is to be reduced, for the purposes of this paragraph, by that proportion.
(7) Gross income or net income is to be disregarded for the purposes of sub-paragraph (2) if the income arises in respect of an amount payable by another member of the worldwide group that is either a UK group company or a relevant group company.
(8) In this paragraph net-basis activity means activity that is normally reported on a net basis in financial statements prepared in accordance with generally accepted accounting practice.

Worldwide trading income of the worldwide group
6G (1) This paragraph applies in relation to paragraph 6A for calculating the worldwide trading income of the worldwide group for a period of account.
(2) The trading income for that period of the worldwide group is the aggregate of
(a) the gross income calculated in accordance with sub-paragraph (3), and
(b) the net income calculated in accordance with sub-paragraph (4).
(3) The income referred to in sub-paragraph (2)(a) the gross income
(a) arising from the activities of worldwide group (other than net-basis activities), and
(b) disclosed as such in the financial statements of the worldwide group,
without taking account of any deductions (whether for expenses or otherwise).
(4) The income referred to in sub-paragraph (2)(b) is the net income arising from the net-basis activities of the worldwide group that
(a) is accounted for as such under international accounting standards, or
(b) would be accounted for as such if income arising from such activities were accounted for under international accounting standards.
(5) In this paragraph net-basis activity means activity that is normally reported on a net basis in financial statements prepared in accordance with international accounting standards.
(6) For provision about references in this Schedule to financial statements of the worldwide group, and amounts disclosed in financial statements, see paragraphs 69 to 72..
111, in schedule 15, page 152, line 39, after first currency insert (the relevant foreign currency).
112, in schedule 15, page 152, line 40, after applies insert 
(a) .
113, in schedule 15, page 152, line 42, leave out from the to end of line 43 and insert relevant foreign currency, and
(b) for the purposes of determining under paragraph 3 the net debt amount of a company, the reference in sub-paragraph (3) of that paragraph to £3 million is to be read as a reference to the relevant amount.
(4) For this purpose the relevant amount means the average of
(a) £3 million expressed in the relevant foreign currency, translated by reference to the spot rate of exchange for the companys start date, and
(b) £3 million expressed in the relevant foreign currency, translated by reference to the spot rate of exchange for the companys end date.(Mr. Timms.)

Stephen Timms: I beg to move amendment 114, in schedule 15, page 161, leave out line 9 and insert
(b) the lower of
(i) the total disallowed amount, and
(ii) the tested income amount..

Jimmy Hood: With this it will be convenient to discuss the following: Government amendments 117 to 124.
Amendment 52, in schedule 15, page 168, line 18, after A, insert or condition B.
Amendment 53, in schedule 15, page 168, line 20, after A, insert or condition B.
Government amendment 125.
Amendment 54, in schedule 15, page 170, line 19, leave out from the finance arrangement.
Amendment 55, in schedule 15, page 171, line 10, leave out an investment company and insert a company with investment business.
Amendment 56, in schedule 15, page 171, line 11, leave out 4 of ICTA and insert 16 of CTA 2009.
Amendment 57, in schedule 15, page 171, line 17, leave out 75 of ICTA and insert 1219 of CTA 2009.
Government amendments 128 and 129.
Amendment 58, in schedule 15, page 172, line 25, leave out from first that to first a in line 26 and insert is referable to.
Amendment 60, in schedule 15, page 173, line 1, leave out from first that to first a in line 2 and insert is referable to.
Government amendments 130 to 137, 140 to 149 and 154.

Stephen Timms: This is a rather large set of Government amendments, all of them necessary to address issues arising in respect of the debt cap calculation, and to ensure that the debt cap achieves its policy aims in particular areas.
Amendment 114 concerns limiting the amount of financing income that can be exempted. Amendment 154 concerns the finance expense and income accrued before the introduction of debt cap rules. Amendments 130, 132 to 134, 140, 141 and 149 relate to capitalised borrowing costs.
There are amendments relating to the exclusion of some expenses or income from the debt cap calculations. Amendment 124 applies to real estate investment trusts, for which it has been the intention, from the outset, to exempt from corporation tax.
Amendments 117 and 118 relate to group treasury companies, amendments 119 to 123 to group treasury services and amendment 129 to already exempt non-departmental public bodies.
In addition to the Government amendments, there are a number of Opposition amendments. I shall be happy to respond to the hon. Member for Fareham after he speaks to them.

Mark Hoban: Before I move on to my amendments, I want to raise a question that has been put to me about the group treasury exemption. The Minister will doubtless be aware that in a number of groups, trading companies will participate in a cash pooling arrangement whereby balances are swept from that company into a central account overnight and transferred back. Such arrangements are considered necessary to undertake treasury activities. The income would then be allocated to that company. One of the concerns expressed to me is that, in such a situation, the trading income is likely to swamp the treasury income and probably would also swamp the income of the pure treasury company within a group in such a way that no group company would be able to qualify as a group treasury company.
It has been suggested that paragraph 42(6) should be amended so that whereas at present it includes any company that undertakes treasury activities for the worldwide group, whether or not it also undertakes other activities, that should be replaced with the exclusion
except where the main activity of that company is conducting trade.
That would reflect the fact that people may be undertaking cash pooling operations as an adjunct to the trading activity, and might be a way of ensuring that the very valuable exemption for group treasury companies is capable of being taken advantage of in those companies in which there are cash pooling arrangements.
I come now to my own amendments. Amendments 52 and 53 are quite simple. I shall explain the issue that I am trying to address. Paragraph 39 of schedule 15 defines financing expense amounts to include loan relationship debitscondition Afinance lease rentals, which is condition B, and costs payable on debt factoring, which is condition C. The definition of finance income amounts of the company includes income arising from similar transactions.
For companies engaged in oil extraction activities, finance expense takes into account amounts that are limited to loan relationship debits, and financing income takes into account only loan relationship credits. Is there a reason why companies involved in oil extraction should not be able to bring into account expenses and income relating to finance lease rentalscondition B? I should be grateful for the Ministers comments on that.
With regard to amendment 54, sub-paragraph (6) of paragraph 47 on page 170 provides for the conditions in the provision to apply to elections relating to finance expenses. It relates to carrying forward non-trading deficits from the finance arrangement. My understanding is that that is technically incorrect and should be amended. Deficits under the loan relationship regime are not specific to a relationship; they are part of a general calculation.
Amendment 55 is another fairly technical amendment. The rules that applied to the expenses of management of investment companies in part IV of the Income and Corporation Taxes Act 1988 were amended in 2004 to apply to companies with investment business as opposed to just investment companies. My amendment would insert the more up-to-date language.
Amendments 56 and 57 are drafting amendments. The references are to the Income and Corporation Taxes Act 1988. That has now been rewritten through the Corporation Tax Act 2009 and my amendments would make the cross-reference to the 2009 Act rather than the 1988 Act. The draft legislation that was published in December last year did not take into account the fact that there needs to be a proper cross-reference to the new Act.
Amendments 58 and 60 relate to the definitions in paragraphs 52 and 53 of the tested expense amount and the tested income amount of relevant group companies. The amounts covered by the definitions are not supposed to refer to periods when a company is not a member of the group. However, the relevant provisions refer to transactions that take place when a company is not a member of the relevant group and do not take account of the fact that either the income or the expense amount are calculated with reference to entries in the accounts which would normally be determined on an accruals basis. The amendments are designed to ensure that the accrued amounts are taken into account or excluded from the two definitions of tested income amount and tested expense amount, as appropriate.
Amendment 59 is another drafting amendment. The suggestion is that the definitions should refer to the whole of the schedule rather than simply to part 7. I would be grateful for the Ministers clarification of whether the drafting in the Bill is correct, or whether it should refer to the schedule rather than the part.

Stephen Timms: I am grateful to the hon. Gentleman for several of the amendments that he has proposed, and I would be happy to accept some of them. It always was our intention, as I mentioned earlier, to exclude companies undertaking oil exploration activities that are subject to specific rules from the scope of the debt cap. There was a drafting oversight, and so the provisions do not exclude finance lease charges from the operation of the debt cap. Amendments 52 and 53 put that right. I am grateful to the hon. Gentleman for them and am happy to accept them.
Amendment 54 is also helpful. It removes an erroneous limitation on identifying the deficits that can be used to determine the amount of finance expense that can be excluded from the calculation under the debt cap. I tabled an amendment that was identical in form but that was not selected. Therefore, I am delighted to accept amendment 54 and again am grateful to the hon. Gentleman for tabling it.
On amendments 55 and 56, other rules in the current clauses deal similarly with excluding financing expense amounts that are payable to group companies with excess management expenses. The rules incorrectly refer to legislation in ICTA rather than CTA 2009, as is now appropriate following consolidation. I am grateful to Opposition Members for picking up on that point and for tabling amendment 57. However, as it does not include the whole of the cross-reference required, I would be grateful if the hon. Gentleman did not press it. Amendments 55 and 56 do insert the correct cross-references.
The hon. Member for Fareham spoke to amendments 58 and 60, which relate to Government amendments 135 to 137. Some groups have interests in companies that are not controlled by the group, but the group is nevertheless entitled to more than 75 per cent. of the profits of those companies. Such a company will not form part of the group for accounting purposes, so its results will not be included in the groups consolidated financial statements. At the moment, such a company would be treated as a member of the group for the purposes of calculating the UK measure of net finance expenses. Government amendment 137 ensures that such a company will be included in the UK measure of net finance expenses only if it is a member of the group for accounting purposes.
The draft clauses as published also contain a rule in paragraph 62(2) that was intended to deal with a particular consequence affecting the general partner of a partnership that owns UK companies. That rule is now redundant due to amendment 137 and could provide avoidance planning opportunities if not removed, so amendments 135 and 136 will remove the measures.
Amendments 58 and 60 are intended to deal with a concern about the finance expense amounts payable and financing income amounts receivable by a UK group company that relates to a period before or after that company is a member of the group. The concern is, for example, that where an amount of financing income relating to a loan made by a UK company before it joined a group continues to be received by the company when it is a member of the group, financing income would not be taken into account in applying the debt cap rules.
I do not agree that the current rules provide for that outcome. Although different statutory language might achieve the same result, I do not think that the amendments are successful. However, it might be helpful for me to put on record a reassurance that the rules in paragraphs 52(3) and 53(3) are intended to work so that only finance expense amounts and financing income amounts that accrue to a UK company while it is a member of the group under consideration are taken into account when calculating any disallowance of finance expenses and any exemption of financing income for the purposes of the debt cap. I hope that on the basis of that reassurance, the hon. Gentleman will feel able to withdraw his amendments. Amendment 59 was dealt with under schedule 14 and accepted this morning.
Finally, the hon. Gentleman expressed a concern at the beginning of his remarks that there was a danger of trading income swamping treasury income in group treasury companies. I do not think that there is a problem, because the amendments proposed ensure that activities traditionally undertaken by treasury companies can be excluded. That includes receiving deposits, making loans, managing cash management schemes and investing surplus funds. In that way, the danger about which he was concerned has been dealt with.

Amendment 114 agreed to.

Stephen Timms: I beg to move amendment 115, in schedule 15, page 161, line 38, at end insert

Balancing payments between group companies: no charge to, or relief from, tax
31A (1) This paragraph applies where
(a) one or more financing income amounts of a company (company A) for the relevant period of account are
(i) by virtue of paragraph 27, not brought into account, or
(ii) by virtue of paragraph 30, reduced,
(b) one or more financing expense amounts of another company (company B) for the relevant period of account are
(i) by virtue of paragraph 15, not brought into account, or
(ii) by virtue of paragraph 18, reduced,
(c) company A makes one or more payments (the balancing payments) to company B, and
(d) the sole or main reason for making the balancing payments is that the conditions in paragraphs (a) and (b) are met.
(2) To the extent that the sum of the balancing payments does not exceed the amount specified in sub-paragraph (3), those payments
(a) are not to be taken into account in computing profits or losses of either company A or company B for the purposes of corporation tax, and
(b) are not to be regarded as distributions for any of the purposes of the Corporation Tax Acts.
(3) The amount referred to in sub-paragraph (2) is the lower of
(a) the sum of the financing income amounts mentioned in sub-paragraph (1)(a), and
(b) the sum of the financing expense amounts mentioned in sub-paragraph (1)(b)..
The amendment aims simply to ensure that balancing payments made within a group are done in a tax-neutral way. The amendment allows businesses to act as they see fit with regard to compensatory payments and ensure that tax law does not intervene. I hope that the amendment will be widely accepted across the Committee.

Amendment 115 agreed to.

Amendments made: 116, in schedule 15, page 165, line 18, at end insert

Part 5A

Anti-avoidance

Schemes involving manipulation of rules in Part 2
38A (1) A period of account of the worldwide group that, apart from this paragraph, is not within paragraph 2(1) is treated as within that provision if conditions A to C are met.
(2) Condition A is that
(a) at any time before the end of the period, a scheme is entered into, and
(b) if the scheme had not been entered into, the period would have been within paragraph 2(1).
(3) Condition B is that the main purpose, or one of the main purposes, of any party to the scheme on entering into the scheme is to secure that the period is not within paragraph 2(1).
(4) Condition C is that the scheme is not an excluded scheme.

Schemes involving manipulation of rules in Parts 3 and 4
38B (1) Where conditions A to C are met in relation to a period of account of the worldwide group (the relevant period of account), the tested expense amount, the tested income amount and the available amount for the period are to be calculated in accordance with paragraph 38D.
(2) Condition A is that
(a) at any time before the end of the relevant period of account, a scheme is entered into, and
(b) the main purpose, or one of the main purposes, of any party to the scheme on entering into it is to secure that the amount of the relevant net deduction (within the meaning given by paragraph 38C) is lower than it would be if that amount were calculated in accordance with paragraph 38D.
(3) Condition B is that a result of the scheme is that
(a) the sum of the profits of UK group companies that arise in relevant accounting periods and that are chargeable to corporation tax is less than it would be if that sum were determined in accordance with paragraph 38D, or
(b) the sum of the losses of UK group companies that arise in relevant accounting periods (other than any taken into account in calculating profits within paragraph (a)) and that are capable of being a carried-back amount or a carried-forward amount is higher than it would be if that sum were determined in accordance with paragraph 38D.
(4) Condition C is that the scheme is not an excluded scheme.
(5) In a case where
(a) a profit or loss arises in an accounting period of a UK group company, and
(b) a proportion of that period does not fall within the relevant period of account,
the profit or loss is to be reduced, for the purposes of condition B, by the same proportion.

Meaning of relevant net deduction
38C (1) In paragraph 38B(2) the relevant net deduction means
(a) the amount by which the total disallowed amount exceeds the tested income amount, or
(b) if the total disallowed amount does not exceed the tested income amount, nil.
(2) In this paragraph the total disallowed amount means
(a) the amount by which the tested expense amount exceeds the available amount, or
(b) if the tested expense amount does not exceed the available amount, nil.

Calculation of amounts
38D (1) References in paragraph 38B to the calculation of any amount or sum in accordance with this paragraph are to the calculation of that amount or sum on the following assumptions.
(2) The assumptions are that
(a) the scheme in question was not entered into, and
(b) instead, anything that it is more likely than not would have been done or not done had this Schedule not had effect in relation to the relevant period of account, was done or not done.

Meaning of carried-back amount and carried-forward amount
38E (1) In paragraph 38B carried-back amount means
(a) an amount carried back under section 393A(1)(b) of ICTA (trading losses),
(b) an amount carried back by virtue of a claim under section 459(1)(b) of CTA 2009 (non-trading deficits from loan relationships), or
(c) an amount carried back under section 389(2) of CTA 2009 (deficits of insurance companies).
(2) In paragraph 38B carried-forward amount means
(a) an amount carried forward under section 76(12) or (13) of ICTA (certain expenses of insurance companies),
(b) an amount carried forward under section 392A(2) or (3) of ICTA (UK property business losses),
(c) an amount carried forward under section 392B(1)(b) of ICTA (overseas property business losses),
(d) an amount carried forward under section 393(1) of ICTA (trading losses),
(e) an amount carried forward under section 396(1) of ICTA (losses from miscellaneous transactions),
(f) an amount carried forward under section 436A(4) of ICTA (insurance companies: losses from gross roll-up business),
(g) an amount carried forward under section 8(1)(b) of TCGA 1992 (allowable losses),
(h) an amount carried forward under section 391(2) of CTA 2009 (deficits of insurance companies),
(i) an amount carried forward under section 457(3) of CTA 2009 (non-trading deficits from loan relationships),
(j) an amount carried forward under section 753(3) of CTA 2009 (non-trading loss on intangible fixed assets),
(k) an amount carried forward under section 925(3) of CTA 2009 (patent income: relief for expenses), or
(l) an amount carried forward under section 1223 of CTA 2009 (expenses of management and other amounts).

Schemes involving manipulation of rules in Part 5
38F (1) This paragraph applies to a financing income amount of a company received during a period of account of the worldwide group if
(a) apart from this paragraph, the financing income amount would, by virtue of paragraph 32, not be brought into account for the purposes of corporation tax, and
(b) conditions A to C are met.
(2) Condition A is that, at any time before the financing income amount is received, a scheme is entered into that secures that any of the conditions in sub-paragraphs (2) to (4) of paragraph 32 (the relevant paragraph 32 condition) is met in relation to the amount.
(3) Condition B is that the purpose, or one of the main purposes, of any party to the scheme on entering into the scheme is to secure that the relevant paragraph 32 condition is met.
(4) Condition C is that the scheme is not an excluded scheme.
(5) Where this paragraph applies to a financing income amount, the relevant paragraph 32 condition is treated as not met in relation to the amount.
(6) Paragraph 38 (meaning of references to a financing income amount of a company) applies for the purposes of this paragraph.

Meaning of scheme and excluded scheme
38G (1) For the purposes of this Part scheme includes any scheme, arrangements or understanding of any kind whatever, whether or not legally enforceable, involving a single transaction or two or more transactions.
(2) For the purposes of this Part a scheme is excluded if it is of a description specified in regulations made by the Commissioners.
(3) Regulations under sub-paragraph (2) may make different provision for different purposes..
Amendment 117, in schedule 15, page 167, line 11, leave out is and insert
, and all other amounts that are relevant amounts in respect of the group treasury company and the relevant period, are.
Amendment 118, in schedule 15, page 167, line 13, leave out this purpose and insert
the purposes of this paragraph in respect of the relevant period.
Amendment 119, in schedule 15, page 167, line 15, at end insert
(3A) If two or more members of the worldwide group are group treasury companies in the relevant period, an election under this paragraph made by any of them is not valid unless each of them makes such an election in respect of the relevant period before the end of the 3 year period mentioned in sub-paragraph (3)..
Amendment 120, in schedule 15, page 167, line 25, leave out not UK companies and insert
neither UK group companies nor relevant group companies.
Amendment 121, in schedule 15, page 167, line 28, leave out that are UK companies and insert
each of which is either a UK group company or a relevant group company.
Amendment 122, in schedule 15, page 167, line 38, leave out and and insert
(ca) subscribing for or holding shares in another company which is a UK group company and a group treasury company,
(cb) investing in debt securities, and.
Amendment 123, in schedule 15, page 168, line 6, at end insert
debt security has the same meaning as in the FSA Handbook..
Amendment 124, in schedule 15, page 168, line 13, at end insert

Real estate investment trusts
42A (1) This paragraph applies where, apart from this paragraph, an amount (the relevant amount) is
(a) a financing expense amount of a company by virtue of meeting condition A in paragraph 39, or
(b) a financing income amount of a company by virtue of meeting condition A in paragraph 40.
(2) The relevant amount is treated as not being a financing expense amount or a financing income amount of the company if the finance arrangement is one to which section 211 of CTA 2009 does not apply by virtue of section 120(3)(a) of FA 2006..(Mr. Timms.)
Amendment 52, in schedule 15, page 168, line 18, after A, insert or condition B.
Amendment 53, in schedule 15, page 168, line 20, after A, insert or condition B.(Mr. Hoban.)
Amendment 125, in schedule 15, page 170, line 3, at end insert
(7) The Commissioners may by regulations make provision (including provision conferring a discretion on the Commissioners) about circumstances in which regulations under sub-paragraph (4) are not to apply in relation to the finance arrangements.. (Mr. Timms.)
Amendment 54, in schedule 15, page 170, line 19, leave out from the finance arrangement..
Amendment 55, in schedule 15, page 171, line 10, leave out an investment company and insert a company with investment business.
Amendment 56, in schedule 15, page 171, line 11, leave out 4 of ICTA and insert 16 of CTA 2009.(Mr. Hoban.)
Amendment 128, in schedule 15, page 171, line 17, leave out 75 of ICTA (expenses of management: companies with investment business) and insert
1219 of CTA 2009 (expenses of management of a companys investment business).
Amendment 129, in schedule 15, page 171, line 42, at end insert

Charities
50A (1) This paragraph applies where, apart from this paragraph, an amount (the relevant amount) is a financing expense amount of a company by virtue of meeting condition A, B or C in paragraph 39.
(2) The relevant amount is treated as not being a financing expense amount of the company if the creditor is a charity.
(3) In this paragraph
charity means any body of persons or trust established for charitable purposes only;
creditor means
(c) in a case where the relevant amount is a debit that meets condition A in paragraph 39, the loan creditor who receives the payment in relation to which the relevant amount arises;
(d) in a case where the relevant amount meets condition B or C in paragraph 39, the recipient of the payment in relation to which the relevant amount arises.

Educational and public bodies
50B (1) This paragraph applies where, apart from this paragraph, an amount (the relevant amount) is a financing expense amount of a company by virtue of meeting condition A, B or C in paragraph 39.
(2) The relevant amount is treated as not being a financing expense amount of the company if the creditor is
(a) a designated educational establishment,
(b) a health service body,
(c) a local authority, or
(d) a person that is prescribed, or is of a description of persons prescribed, in an order made by the Commissioners for the purposes of this paragraph.
(3) The Commissioners may not prescribe a person, or a description of persons, for the purposes of this paragraph unless they are satisfied that the person, or each of the persons within the description, has functions some or all of which are of a public nature.
(4) In this paragraph
creditor means
(e) in a case where the relevant amount is a debit that meets condition A in paragraph 39, the loan creditor who receives the payment in relation to which the relevant amount arises;
(f) in a case where the relevant amount meets condition B or C in paragraph 39, the recipient of the payment in relation to which the relevant amount arises;
designated educational establishment has the same meaning as in section 105 of CTA 2009;
health service body has the same meaning as in section 519A of ICTA..(Mr. Timms.)
Amendment 59, in schedule 15, page 172, line 33, leave out Part and insert Schedule.(Mr. Hoban.)
Amendment 130, in schedule 15, page 173, line 24, leave out income statement and insert financial statements.
Amendment 131, in schedule 15, page 173, line 36, leave out redeemable.
Amendment 132, in schedule 15, page 174, line 2, leave out income statement and insert financial statements.
Amendment 133, in schedule 15, page 174, line 14, leave out income statement and insert financial statements.
Amendment 134, in schedule 15, page 174, line 33, leave out income statement and insert financial statements.
Amendment 135, in schedule 15, page 175, line 30, leave out sub-paragraph (2).
Amendment 136, in schedule 15, page 175, leave out lines 36 to 39.
Amendment 137, in schedule 15, page 178, line 13, after if insert
the company is a member of the worldwide group and.
Amendment 138, in schedule 15, page 178, line 20, leave out sub-paragraph (7).
Amendment 139, in schedule 15, page 178, line 28, leave out sub-paragraph (9).
Amendment 140, in schedule 15, page 178, line 35, leave out or an income statement of the worldwide group.
Amendment 141, in schedule 15, page 178, line 37, leave out sub-paragraph (3).
Amendment 142, in schedule 15, page 179, line 3, leave out from not to and in line 4 and insert acceptable.
Amendment 143, in schedule 15, page 179, line 10, leave out sub-paragraph (3) and insert
(3) For the purposes of this paragraph financial statements are acceptable if
(a) they are drawn up in accordance with international accounting standards,
(b) they meet such conditions relating to accounting standards, or accounting principles or practice, as may be specified in regulations made by the Commissioners, or
(c) conditions A to C are met..
Amendment 144, in schedule 15, page 179, line 18, leave out of the worldwide group for the period.
Amendment 145, in schedule 15, page 179, line 20, after second the insert same.
Amendment 146, in schedule 15, page 179, line 25, leave out from the to , and in line 26 and insert financial statements.
Amendment 147, in schedule 15, page 179, line 28, leave out from in to drawn in line 29 and insert
IAS financial statements of the worldwide group for the same period, were such statements.
Amendment 148, in schedule 15, page 179, line 32, leave out from first the to are and insert financial statements.
Amendment 149, in schedule 15, page 180, line 17, at end insert
 (1A) References in this Schedule to amounts disclosed in financial statements do not include, in the case of an amount that
(a) is an amount mentioned in paragraph 55(1)(a) to (g), and
(b) has been capitalised and is accordingly included in the balance sheet comprised in the financial statements,
any part of that amount that was included in a balance sheet comprised in financial statements for an earlier period..
Amendment 150, in schedule 15, page 181, line 4, at end insert
FSA Handbook means the Handbook made by the Financial Services Authority under FISMA 2000;.
Amendment 151, in schedule 15, page 181, line 12, at end insert
 In paragraph 5 of Schedule 28AA to ICTA (provision not at arms length), after sub-paragraph (8) (as inserted by paragraph 14 of Schedule 14 to this Act) insert
(9) For the purposes of sub-paragraph (1), Schedule 15 to FA 2009 (tax treatment of financing costs and income) is to be disregarded..
Amendment 152, in schedule 15, page 181, line 15, after group insert 
(a) .
Amendment 153, in schedule 15, page 181, line 15, at end insert , or
(b) to which paragraph 79 applies.

Anti-avoidance: change of period of account of worldwide group
79 This paragraph applies to a period of account of the worldwide group (the relevant period of account) if
(a) the ultimate parent of the group changes the date to which financial statements of the group are drawn up,
(b) as a result of the change, the relevant period of account
(i) begins before 1 January 2010, and
(ii) includes a period that would, if the change had not been made, have fallen within a period of account beginning on or after that date, and
(c) the main purpose, or one of the main purposes, of the ultimate parent of the group in making the change is to secure that the first period of account in relation to which this Schedule has effect does not include any period falling within the relevant period of account..
Amendment 154, in schedule 15, page 181, line 15, at end insert

Transitional provision
(1) An amount that would, apart from this paragraph, meet condition A, B or C in paragraph 39 (definition of financing expense amount) does not meet that condition if it is a debit that, but for a relevant enactment, would be brought into account for the purposes of corporation tax in an accounting period beginning before 1 January 2010.
(2) For this purpose the following are relevant enactments
(a) section 373 of CTA 2009 (late interest treated as not accruing until paid in some cases),
(b) section 407 of that Act (postponement until redemption of debits for connected companies deeply discounted securities),
(c) section 409 of that Act (postponement until redemption of debits for close companies deeply discounted securities), and
(d) regulation 3A of the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 (S.I. 2004/3271) (prescribed debits and credits brought into account over prescribed period).
(3) An amount that would, apart from this paragraph, meet condition A, B or C in paragraph 40 (definition of financing income amount) does not meet that condition if it is a credit that, but for the regulation mentioned in sub-paragraph (2)(d) of this paragraph, would be brought into account for the purposes of corporation tax in an accounting period beginning before 1 January 2010..(Mr. Timms.)

Stephen Timms: On a point of order, Mr. Hood. I am concerned that I may have become somewhat confused in the measures that we have just taken. My advice to the Committee would not be to accept amendments 57, 58 and 60, as I said earlier.

Jimmy Hood: The amendments to which the Minister refers were not taken.

Stephen Timms: I am grateful for that, Mr. Hood.

Jimmy Hood: I appreciate the Ministers gratitude.

Question proposed, That the schedule, as amended, be the Fifteenth schedule to the Bill.

Mark Hoban: Not wishing anyone to think that I had exhausted schedule 15I have been overwhelmed by the Ministers generosity in accepting some of the amendments that I tabledI want to explore one or two points that I think are important. The Minister probably addressed one of them when we debated the last but one group of amendments.
One issue about the construction of the measure is the use of the available amount that is defined in part 8 and the tested expense amount or tested income amount that is defined in part 7. Calculations of the former are based on financial statements, whereas calculations of the latter are based on tax computations. That would not be a problem if there were a perfect alignment between UK generally accepted accounting practice and international financial reporting standards and the basis on which tax computations are prepared. Life would be fantastic if it were that simple, but it is not, and there are gaps. That creates a tension when those differences are important in the calculation of either the tested amount or the available amount.
One issue that the Minister referred to when we debated the penultimate group of amendments was deadlocked joint venture companies. One party may have 75 per cent. of the ordinary share capital but 51 per cent. of the income, but because of the arrangements between the two owners, there is deadlock, so it does not count towards control when it comes to the consolidated results of either partner in the venture.
The tested expense amount is defined as
the sum of net financing deduction of each relevant group company
in paragraph 52(1), but according to paragraph 68(6), a relevant group company would be a 75% subsidiary. The situation is that the tested amount would include the expenses of a relevant group company, but the available amount would not take that into account because of the deadlock arrangements between two shareholders in a joint venture such as the one I described. I should be grateful if the Minister could tell us whether that anomaly was resolved by the last but one group of amendments or whether further work needs to be done to get the two calculations into line.
Another issue arises on the same point in connection with financial instruments by virtue of paragraph 39(2). Where a company has borrowed in dollars and then swapped the loan into sterling, if the contract rate accounts for the arrangement of the UK GAAP there would be a synthetic sterling interest which would be a finance expense account. However, where the accounts and the arrangements are under FRS 26 or IFRS, the US dollar interest would be included with the swap being ignored. Is this the result that is intended here?
Under paragraph 39(3), where a company accounts for a loan on a fair value basis, fair value movements are included within the finance expense account and therefore the tested amount. However, the equivalent amounts are not included in the available amounts. So a gapthat is perhaps the wrong word to use in this contextis opening up. Another issue may arise on partnerships because of the way they are dealt with and the question whether they are transparent for tax purposes. It is difficult to assess how significant these issues are, but I should be grateful if the Minister could share his thoughts with the Committee on how the differences between accounting and tax treatment work.

Stephen Timms: I think that some of the amendments that we have been debating will address some of the hon. Gentlemans concerns. Amendment 137, which ensures that a UK company must be a member of the group for accounting purposes, would deal with the problem of deadlocked joint ventures. On his concern about available versus total calculations, several potential mismatches created by the different treatment of more complex financial arrangements have been raised with us. The draft clauses published in December included a wider definition of finance expenses and finance income which would have prevented some of those mismatches, but there was a strong view from businesses that we should remove the impact of foreign currency adjustments and payments and receipts from derivative contracts from the debt rules.
I accept that narrowing the definitions might raise some problems, but I am cautious about introducing a quick solution to reintroduce other complexities that we wanted to eliminate. We will continue to look at these, consulting with interested parties. If we can find suitable solutions, we can announce additional rules at the time of the PBR which could take effect from 1 January 2010, although the legislation would follow shortly afterwards.

Question put and agreed to.

Schedule 15, as amended, accordingly agreed to.

Peter Bone: On a point of order, Mr Hood. We have just agreed the schedule: when will Hansard be produced so that we can check which amendments were accepted? I share the same concern as the Chief Secretary about what we went through and voted on.

Jimmy Hood: I thank the hon. Gentleman for his point of order, which is really a point of clarification. I have the script in front of me, and I can assure him that he and the Minister are wrong.

Clause 36 ordered to stand part of the Bill.

Schedule 16

Controlled foreign companies

Stephen Timms: I beg to move amendment 155, in schedule 16, page 182, line 32, at end insert and
( ) in this Act, section 57(6)..

Jimmy Hood: With this it will be convenient to discuss Government amendment 156.

Stephen Timms: I am, again, grateful for your clarification.
Schedule 16 makes consequential changes arising from what we have just agreed to the controlled foreign company rules designed to stop UK groups from artificially diverting profits to low-tax territories in order to avoid paying UK tax on those profits. The controlled foreign company rules counter this by charging UK tax on the diverted profits. The controlled foreign company legislation is subject to a series of exemptions, two of which are the subject of this schedule. Those are, first, the acceptable distribution policy and, secondly, exemptions for holding companies. Following the introduction of an exemption regime for foreign dividends, these exemptions are no longer appropriate and are removed.
Amendment 155 is tabled to repeal clause 57(6) of this Bill with effect for accounting periods of controlled foreign companies beginning on or after 1 July 2009. This clause contains double taxation provisions that come into effect for dividends paid on or after 1 April 2008, but subsection (6) will no longer be needed from 1 July 2009 as the ADP exemption is repealed on that day as a consequence of the introduction of dividend exemption.
Amendment 156 is tabled to remove a mismatch between the controlled foreign company and double taxation rules to ensure that there is consistent treatment of profits arising before and after commencement. Although scope for abuse does exist, this mismatch is more likely to produce the wrong result and therefore needs to be corrected. It reflects an omission that unfortunately did not come to light during earlier consultation. On that basis, I hope that the Committee will accept the amendments.

John Pugh: I do not have a problem with the amendments, but I want to probe the Minister on one point. Controlled foreign companies, being controlled foreign holding companies, are obviously a good thing and international commerce creates sundry types and forms, and various structures will exist internationally, and that is all to the good. There is a natural moral distinction between legitimate companies as part of ordinary business development and illegitimate companies that are set up expressly for the purpose of tax avoidance. There seems to be a parallel distinction in schedule 16 between local holding companies, which enjoy exemptions, and non-local holding companies, which have their exemptions withdrawnas is also the case with superior holding companies. I support that; I support all the changes in corporate taxation that have been identified by the Minister. The acid test, and it seems a fair test, is always identifying the ultimate corporate parent or beneficiary.
I admit that it is slightly tangential, but I would like to ask the Financial Secretary about the Tesco case. I am not familiar with its exact techniques, but the Minister will be aware that it set up a controlled foreign company in Liechtenstein. This was not to avoid corporation tax, which it was accused of by The Guardian and which it exonerateditself from, but in order to avoid stamp duty. Do the provisions in schedule 16 have any implications for such tax loopholes?

[Mr. Peter Atkinsonin the Chair]

Stephen Timms: Mr. Atkinson, I welcome you to our deliberations this afternoon. I shall respond to the points that the hon. Gentleman made in my clause stand part speech. I do not think that the question arises specifically from the amendments.

John Pugh: I apologise for that. I thought that we were not having a clause stand part debate.

Stephen Timms: I am happy to speak more generally about the schedule, if that would be helpful to the Committee, having moved the Government amendments as well.
Schedule 16 amends the controlled foreign company rules. The rules work by apportioning the profits of the foreign subsidiary back to the UK, therefore subjecting those profits to a UK tax charge. The impact of the present legislation is limited by a series of exemptions, which are designed to exclude from charge those foreign subsidiaries that can reasonably be assumed to exist for reasons other than to divert profits artificially from the UK. Two of those exemptions are subject to the provisions of the clause and schedule; they are the acceptable distribution policythe ADP exemptionand holding company exemptions. Following the introduction of an exemption regime for foreign dividends, those two exemptions from the rules are no longer appropriate and are therefore removed.
The acceptable distribution policy exemption applies when 90 per cent. or more of the foreign subsidiarys profits are paid back to the UK as dividends. The premise underlying the ADP exemption was that, as dividends were taxable in the UK, there was no significant UK tax avoidance. However, introducing an exemption regime means that most dividend payments from foreign subsidiaries will no longer be taxable, so the exemption becomes redundant. The ADP rules are therefore repealed on 1 July 2009, the same day that the dividend exemption is to be introduced. Schedule 16 makes provisions for accounting periods straddling that date to be split into two. That will ensure that profits accruing prior to the introduction of the dividend exemption can still qualify for the ADP exemption.

Peter Bone: In my copy of the amendment paper, Government amendment 155 states
line 32, at end insert and.
That is followed by two brackets and
in this Act, section 57(6).
What on earth do those two brackets mean?

Stephen Timms: I imagine that those two brackets refer to a continuation of the numbering system, but I may come back to that point.
I was explaining the ADP exemption. I shall now move on to the holding company exemption. The other exemption that we are reforming is that for foreign subsidiaries that qualify as holding companies. Generally, the exemptions allow companies that receive mainly the specified types of income, and little other income, to be exempt from the CFC rules. There are different categories of holding companies, depending on the specified types of income. Schedule 16 removes the superior and non-local holding company exemptions, as most foreign dividends will now be exempt. Retaining those exemptions in such circumstances represents an unacceptable risk to the Exchequer. Groups could abuse the exemptions by recycling dividends within the group, resulting in increased amounts of profit and tax on those profits being diverted from the UK.
To allow companies time to adapt to the rules, we are introducing a two-year transitional period. During that time, the exemptions will be available only in a restricted form to mitigate Exchequer risk. The transition period will also overlap with the longer term CFC review, allowing business to consider the outcome of this change alongside the removal of the holding company exemptions.

Mark Hoban: The Minister referred to a transitional period, but one of the issues that I see being flagged up is that some exemptions will continue through the transitional period so long as the company continues to be held within the group and there is no change of ownership. I can understand the Government wishing to prevent a change of ownership arising as part of a tax planning device, but in some cases the change of control will be for legitimate commercial reasons. Why, in such cases, should legitimate commercial transactions lose the benefit of the transitional relief?

Stephen Timms: The hon. Gentleman is right that the exemption will be available only in the restricted form to mitigate Exchequer risk during that two-year period. If I may, I shall reflect on the hon. Gentlemans precise question, and come back to him before finishing.
The local holding companies exemption will be retained, as it is typically required for commercial reasons and retaining the rules does not pose a significant risk to the Exchequer.
I think that I am now in a position to answer the question that the hon. Member for Fareham asked about whether condition A is too stringent, if I understood it correctly. The condition means that groups cannot sell companies defined as qualifying holding companies to another group and take advantage of the transitional rules. That prevents groups from buying qualifying holding companies to shelter income from the UK. The definition of control allows groups to move those companies intra-group so that they can restructure if they wish.

Mark Hoban: The Minister gets the point exactly. I understand that the restriction is to prevent that sort of tax structure to shelter profits, but there may be a sensible commercial reason why a group decides to sell a holding company and the activities that sit beneath it. It may decide that it wants to sell its tobacco interests in Spain, for example, and sell that group of companies to another business. The acquirer will lose the exemption where there is a legitimate commercial reason for the sale. It is not a transaction to avoid or reduce the tax bill; it is a legitimate commercial transaction with solid commercial substance to it, but the benefit of the transitional relief is lost as a consequence of the sale.

Stephen Timms: It may be that the most helpful thing I can do is reflect on the hon. Gentlemans point and write to him setting out my conclusions.
Two other points were made in the debate. The hon. Member for Southport asked about implications for stamp duty. It is difficult for me to comment on a particular company. Although I was interested by The Guardianseries, I do not recall the case that he referred to. The purpose of the controlled foreign company rules is to protect against corporate tax avoidance of the kind that the series discussed. The changes have no implications for stamp duty, as far as I am aware. That may answer the hon. Gentlemans question, but he will appreciate that I cannot comment on the particular case.

John Pugh: It is slightly anomalous to create a regime that prevents people from setting up holding companies to avoid corporation tax and leaves open loopholes through which they can avoid other sorts of taxation by similar methods.

Stephen Timms: I do not think that we are opening any loopholes. We are not making any changes to stamp duty.
Finally, in response to the hon. Member for Peterborough, as I suggested, the brackets are there to continue the numbering on from whatever the previous numbering was.

Peter Bone: I am Wellingborough, but never mind.

Stephen Timms: I apologise.

Amendment155 agreed to.

Amendments made: 156, in schedule 16, page 183, line 4, after 17 insert , and Part 18,.
Amendment 157, in schedule 16, page 187, line 29, at end insert

Part 3

Reduction in chargeable profits for certain financing income

Reduction in chargeable profits for certain financing income
21 ICTA is amended as follows.
22 In the following provisions, after 751A insert or 751AA
(a) section 747(3A) and (5A) (imputation of chargeable profits and creditable tax of controlled foreign companies),
(b) section 749(10) (residence),
(c) section 749A(9) (elections and designations under section 749: supplementary provisions), and
(d) section 750(3)(ab) (territories with a lower level of taxation).
23 After section 751A (reduction in chargeable profits for certain activities of EEA business establishments) insert
751AA Reduction in chargeable profits for certain financing income
(1) This section applies if
(a) an apportionment under section 747(3) falls to be made as regards an accounting period (the relevant accounting period) of a controlled foreign company,
(b) the chargeable profits of the controlled foreign company for the relevant accounting period would, apart from this section, include an amount of income in respect of a payment made by another company (the payer),
(c) the amount that the payer brings into account for the purposes of corporation tax in respect of the payment is reduced (in part or in full) by virtue of Part 3 of Schedule 15 to FA 2009 (tax treatment of financing costs and income), and
(d) a company resident in the United Kingdom (the UK resident company) has a relevant interest in the controlled foreign company in the relevant accounting period.
(2) The UK resident company may make an application to the Commissioners for Her Majestys Revenue and Customs for the chargeable profits of the controlled foreign company for the relevant accounting period (the chargeable profits) to be reduced by an amount (the specified amount) specified in the application (including to nil).
(3) If the Commissioners grant the application
(a) the chargeable profits are treated as reduced by the specified amount, and
(b) the controlled foreign companys creditable tax (if any) for that period is treated as reduced by so much of that tax as, on a just and reasonable basis, relates to the reduction in the chargeable profits,
for the purpose of applying section 747(3) to (5) for determining the sum (if any) chargeable on the UK resident company under section 747(4)(a) (but for no other purpose).
(4) The Commissioners may grant the application only if they are satisfied that the specified amount does not exceed the relevant amount.
(5) In subsection (4) the relevant amount means the amount (if any) by which it is just and reasonable that the chargeable profits should be treated as reduced, having regard to the effect of Parts 3 and 4 of Schedule 15 to FA 2009 on amounts brought into account for the purposes of corporation tax by the payer, or any other company.
24 (1) Section 751B (supplementary) is amended as follows.
(2) In the heading, for Section 751A substitute Sections 751A and 751AA.
(3) In subsections (1), (2), (3) (in each place) and (5), after 751A insert or 751AA.
(4) In subsection (8)
(a) after the relevant amount insert 
(a) in the case of an appeal in respect of the refusal of an application under section 751A,, and
(b) after mentioned in that subsection insert , and
(b) in the case of an appeal in respect of the refusal of an application under section 751AA, has the meaning given by subsection (5) of that section.
(5) In subsection (10)
(a) after 751A insert or 751AA, and
(b) after 751A(1) insert or 751AA(1).

Commencement
25 (1) The amendments made by this Part have effect in relation to accounting periods of controlled foreign companies ending on or after 1 January 2010.
(2) For this purpose accounting period and controlled foreign company have the same meaning as they have for the purposes of Chapter 4 of Part 17 of ICTA..(Mr. Timms.)

Question proposed, That this schedule, as amended, be the Sixteenth schedule to the Bill.

John Howell: The Minister sat down before I could intervene on him, but I had a question about the changes in the schedule. I am aware of the extent to which the CFC legislation is being revised, and that a group is advising HMRC and the Treasury on this matter. I seek some guidance from him, however. It is envisaged that the measures will not take effect for some time, and further changes to CFC legislation are likely to be made as we go along. Is this not premature and destabilising with regards to the long-term view of how the CFC legislation should emerge?

Stephen Timms: I think that I can reassure the hon. Gentleman. He is right that we are introducing a two-year transitional period, which I think is right to enable companies to make adjustments. In the early part of the period, we will review the CFC rules, but will do so in the light of the legislation before us. He is right to say that a number of things are going on here with the CFC rules, but we will need to ensure that they are properly co-ordinated and that we do not run into problems of the kind that he perfectly reasonably warns us about.

Question put and agreed to.

Schedule 16, as amended, accordingly agreed to.

Clause 37

International movement of capital

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I welcome you to the Chair, Mr. Atkinson, for the graveyard slotwell, I hope it is the graveyard slotof todays sitting.
Clause 37 cropped up in the Chamber, earlier today, during Treasury questions, when the hon. Member for North-West Leicestershire (David Taylor) raised a concern about whether the clause would make it easier for businesses to participate in tax avoidance schemes by being able to engage in transactions that move businesses offshore without letting the Treasury know. He asked whether we were in danger of making it easier for people to engage in the sort of transactions about which the hon. Member for Southport seemed to be concerned during the previous debate. In a sense, the arguments of the hon. Member for North-West Leicestershire have been lent some support. Tax advisers have told me that they welcome clause 37 and schedule 17, which must instantly cause those considering such matters from the other side of the debate to think, There must be something here to think about. Will this be a charter for encouraging such activity?
My understanding is that the existing regime for Treasury consent will be swept away. However, one issue that comes up in the correspondence and debate on this matter is whether the regime that the Treasury is considering will be effective in helping businesses to comply and in helping to promote certainty for taxpayers. The existing regime had a set of general consentsdocument M03/88and if someone is taking part in one of those transactions, there is no requirement to notify the Treasury or to gain its consent. Clause 37 paves the way for the repeal of that legislation. We now have a new set of reporting requirements for certain transactions exceeding £110 million. On one level, the Government are saying that they will remove the Treasury consent regime and that there will be no replacement for the general consents. However, HMRC has a regulatory power under the Bill to designate excluded transactions, augmenting the list of excluded transactions in paragraph 9 of schedule 17. Until HMRC exercises its powers though, taxpayers will have to report more transactions than at present.
The list of transactions in paragraph 9 is not as broad as that in the current general consents, and there is a concern that many common commercial situations will need to be reported, resulting in a greater compliance burden. That runs counter to the Governments aim and to the expectation of the hon. Member for North-West Leicestershire and others.
I have a short listyou will be pleased to note, Mr. Atkinsonof those existing consents that people have said they would like to see under the new regime. They include the issue of shares by a non-UK company to a UK company, the issue of shares by non-UK companies to a third party, rights issues, the issue of debentures and the issue of shares by Commonwealth countries. I would be grateful for the Ministers thoughts as to where the excluded transactions regime will get to.
There is also an issue relating to private equity funds and limited liability partnerships. The new rules, in paragraph 5 of schedule 17, require reporting by UK bodies corporate that control non-UK companies. However, in certain situations a UK body corporate might be considered to control non-UK companies, but reporting might be considered inappropriate. For example, many private equity structures include a UK body corporate such as a limited company or a limited liability partnership as the funds general partner. If that fund holds UK investments, the general partner might be required to report transactions over which it has little or no influence. There could be an amendment to the effect that bodies corporate that are general partners of collective investment schemes, as defined by the Financial Services and Markets Act 2000, could be exempted. That would avoid inappropriate reporting requirements.
It would help if the Minister gave a bit more background to the proposals in clause 37 and schedule 17, to provide a clearer understanding of how he expects the new regime to work. How can he reassure his hon. Friends that this is not a tax avoidance charter and at the same time give comfort to businesses that it will not lead to a much more onerous regime?

Stephen Timms: Clause 37 introduces schedule 17, which removes the existing Treasury consents legislationdating from 1951and replaces it with a modernised post-transaction reporting requirement. The existing rules are out of date and are not in line with current business practice. We are committed to having information available for the detection and countering of tax avoidance. There is absolutely no weakening of our resolve on that front, which is reflected here, and which I will set out perhaps in more detail when we debate the amendments tabled by the hon. Member for Southport.
We want to maintain a corporate tax regime that keeps pace with how businesses operate today, so the new reporting requirement will apply only to material from transactions that pose a significant risk of tax avoidance, with a value in excess of £100 million. That will give HMRC the information that it needs to detect tax avoidance, and, as we will discuss when we come to those amendments, by targeting the report the administrative burden for businesses is reduced.
The new rules remove the need to apply to the Treasury before entering into commercial transactions. That decision will be left to businesses, making it easier for them to operate. The administrative burdens will be significantly reduced by introducing the £100 million threshold, reducing the number of reportable transactions and reducing the amount of information that needs to be reported.
We are also removing the rather outdated criminal penalty that was attached to the Treasury consents rules. In response to representations, we have extended the exclusions to include a number of the general consents that are available in the Treasury consents rules. The draft legislation published in December included a number of exclusions from the new reporting requirement in addition to the de minimis limit of £100 million and in the consultation it became clear that without additional exclusions, the rules could generate reports that were of little value to HMRC. We have added a number of further exclusions to the draft regulations, which are essentially a replication of the existing general consentsalthough we have removed some of the more dated elements.
In drafting the regulations, we have deliberately copied the language because it is already familiar to businesses and, together with a new exclusion for cash pooling arrangements, these measures will address the concerns expressed about recurring transactions. The draft regulations will be published on the HMRC website. In that way, we have both provided the safeguards against avoidance, which were rightly of concern to my hon. Friend the Member for North-West Leicestershire, the hon. Member for Southport and, I imagine, to Conservative Members, while significantly easing the regulatory burden on businesses in a helpful way. We have got that balance right, and I hope that the Committee as a whole will work on that.

Question put and agreed to.

Clause 37accordingly ordered to stand part of the Bill.

Schedule 17

International Movement of Capital

John Pugh: I beg to move amendment 41, in schedule 17, page 189, line 41, leave out £100 and insert £1.

Peter Atkinson: With this it will be convenient to discuss: amendment 42, in schedule 17, page 190, line 34, leave out paragraphs (a) and (b).

John Pugh: I have supported the legislation up to now, but I cannot help thinking that, having done some sterling work, the Minister has with this schedule snatched defeat from the jaws of victory. I would like to put that in some context.
In clause 37 schedule 17, we are repealing section 765 of the Income and Corporation Taxes Act 1988. The provision, which has existed in various forms for 58 years, demands that companies enacting schemes whereby they move funds out of the EUand, obviously, the UK before thatreceive consent to do so from the Revenue. As the Minister undoubtedly explained, that is a hangover from the days of exchange control, when people worried about sterling leaving the country and so on. The provision is very broadly drafted and it encourages firms to notify the Treasury of anything that is to its detriment. As the Minister said, the provision has some old-fashioned, but severeand, I suppose, effectivecriminal sanctions attached.
The reality is that the retention of section 765 over the years has been fairly useful. It has forced companies to disclose schemes to the Revenue before undertaking them. The fact that the measure is backed up by draconian measures, even though they are unlikely to be used, adds to its force. It gives UK revenue authorities some real-time information about the activities of multinational companies. That is a good thing because state revenue authorities normally play a constant game of catch-upcorporations undertake schemes and then the revenue body finds out about them. Section 765 is virtually unique in tax law because it allows the Revenue to know what companies plan to do before they do it. It has been a major anti-avoidance measure because it forces multinationals to receive Government consent and, presumably, as a result many tax avoidance schemes are stopped before they are started.
I know that we cannot quantify the benefits of section 765, but they have been real. Do not take my word for it: four years ago, the former Paymaster General, now the Minister for Children, the right hon. Member for Bristol, South (Dawn Primarolo), said: the section was introducedand presumably kept
to counter tax avoidance; it has done that successfully and should not be repealed, as it protects a great deal of revenue.[Official Report, Standing Committee B, 30 June 2005; c. 319.]
In modern business terms, I accept that there is a case for pensioning off section 765 and replacing it with something better. However, the provisions in the Bill do not inspire confidence that we have something better. There are a couple of reasons for that. First, at £100 million, the threshold is high. Companies, such as multinationals, that wish to avoid breaching that threshold can simply parcel transactions into smaller units of £10 million or whatever, which is within their wit to do. Secondly, the penalties for companies that do not comply with the legislation are feeble. If a company gets away with a major bit of tax evasion or tax avoidance, they face a fine of £300 if they have not reported after six months. I cannot see that frightening anyone who is serious about tax avoidance. The penalty for every further day of non-reportage is £60. I suggest that the new set of provisions does not have the teeth that it should have.
Amendment 41 considers the requirement for reporting transactions of £100 million or more and suggests that it is absurd as it stands. I cannot see any reason why we should choose that figure, which seems unreasonably high. My amendmentit is a probing amendmentreduces the limit drastically to £1 million for the purposes of the schedule. That is the point about the threshold.
If we look at exemptionsthe Minister has talked about exemptions and about how they oil the wheels of commerce, how they are a good thing and how they avoid undue compliance costs and so onwe see that they are extraordinarily generous when they are read in the literal sense. For example, if someone is in difficulties and the Revenue comes after them and there is a suggestion of tax avoidance, they can plead that the transaction
is carried out in the ordinary course of a trade.
That strikes me as an extraordinarily vague provisionalmost a licence for abuse. One can almost see tax planning advisers preparing the excuse well in advance. I am not at all comfortable with retaining that provision, because it is broad, colloquial and it seems a catch-all excuse that almost anyone can use when challenged by the Revenue. As far as I am concerned, it can only help tax avoidance and it does not really have a significantly beneficial purpose for the schedule as a whole.
The second exemption is, if anything, worse. It says that the transaction is exempt if
all the parties to the transaction are, at the time the transaction is carried out, resident in the same territory.
Therefore, if all transactions are carried out in the Cayman Islands, they would be exempt from reporting. That is an open invitation to use secrecy jurisdictionsa licence and an invitation to go in for tax avoidance. Therefore, although I support almost everything that the Minister has done hitherto, I think that we have here a schedule that opens the door to a new wave of tax avoidance. The Minister should seriously address the weaknesses in schedule 17. The fact that many people who are involved in tax law welcome it adds to the concern.

Peter Atkinson: Amendment proposed in schedule 17, page 189, line 41, leave out £100 and insert £1.

John Pugh: On a point of order, Mr. Hood. I was speaking to both amendments at the same time.

Peter Atkinson: Had you finished speaking on amendments 41 and 42?

John Pugh: I have spoken on both amendments, yes.

Stephen Timms: I am grateful for the support that the hon. Member for Southport has given to the changes that we have made so far today to foreign profits taxation, and I will endeavour to persuade him that he should support this element of the Bill as well.
Schedule 17 repeals the existing Treasury consents rules, which are at sections 765 to 767 of the Income and Corporation Tax Act 1988, and replaces them with a targeted reporting requirement. At the moment, the rules require companies to seek advance consent from the Treasury before undertaking certain transactions involving foreign subsidiaries, and they include a criminal penalty of imprisonment for non-compliance, although that has never been used, as the hon. Gentleman rightly said, in the 58 years during which the rules have been in place.
In 1951, the rules were aimed mainly at controlling company migrations at a time of foreign exchange control. Over the decades, in response to changes in UK tax law and changing business practice, the situations to which the rules apply have changed. Their aim is to prevent groups from entering into transactions that could result in a loss of tax to the Exchequer.
It might reassure the hon. Gentleman to know that as far as I am aware, no other country has such a regime in place. He is right to refer to what the then Paymaster General, my right hon. Friend the Member for Bristol, Southshe is much missed from this Committees debatessaid during debate on the Finance Act 2005 about the Treasury consent rules protecting a great deal of revenue, but she went on to say that we would consider section 765, the relevant section,
in the context of work on the wider international context of the corporation tax system.[Official Report, Standing Committee B, 30 June 2005; c. 320.]
The culmination of that work is what we are debating today.
Consent is very rarely refused these days, but the rules impose a significant administrative burden, which is why we think that the time has come to repeal them. However, the hon. Gentleman is absolutely right: we need to ensure that HMRC gets the information that it needs to detect and prevent tax avoidance. HMRC monitors tax avoidance closely using a range of different tools. We have been taking steps consistently to tackle avoidance by reforming the tax system, closing loopholes and introducing the disclosure regime that he mentioned. Anti-avoidance measures introduced in recent years have closed more than £11 billion in avoidance opportunities.
We will certainly need to stay energetically on the case, as the pressure from would-be avoiders does not diminish. Continuous action is needed to mitigate the effects of tax avoidance, particularly at a time of global economic difficulties. The hon. Gentleman will know that some of the discussions that we had at the G20 summit on that topic reflected concerns about tax avoidance outside the UK, not least on the part of President Barack Obama.
We are therefore putting in place a modernised post-transaction reporting requirement targeted at changes in the capital structure of multinational groups. It will provide an early warning if multinational groups enter into large cross-border capital reorganisations that could give rise to tax avoidance and ensure that, having been alerted early, we can monitor what happens closely.

Brian Binley: I am listening intently to the Minister. We have here a measure that is designed to give forewarning of sizeable transactions that the Department needs to look at more closely. Will he touch on the business of people who might wish to avoid paying sizeable amounts of tax being fined £300? That worried me, too. I just do not see the connection. Can he explain the thinking behind that level of fine?

Stephen Timms: I will certainly address the points raised specifically about the amendments, including that one.
The hon. Member for Southport is right: the new reporting requirement applies to transactions involving foreign investments with a value in excess of £100 million. Transactions above that are reportable, so we are targeting the transactions about which HMRC most needs information. The rules are targeted in that way as a result of HMRCs experience with high-value cross-border transactions, to ensure that it can concentrate its time and effort most productively.
Amendments 41 and 42 both seek to widen the scope of the new rules. Amendment 41, as we have heard, proposes reducing the de minimis limit from £100 million to £1 million. The difficulty is that that would result in a large number of relatively low-value transactions that are not the target of the provision coming within its scope. That would significantly increase the administrative burden without generating the kind of really useful information that HMRC needs. The new reporting requirement focuses on changes to the capital structure of multinational groups. Those are the kind of changes featured, for example, in The Guardian series referred to earlier by the hon. Member for Southport, where large amounts of tax are at stake and where we need to concentrate our efforts. As can be seen from the FTSE 100, the net market capitalisation of such businesses runs into many billions of pounds. We need to target material changes or restructurings and not divert HMRC energy away from those high-risk areas of potential tax avoidance to low-risk areas.
I remind the Committee that the Government have a lot of tools available for detecting and countering tax avoidance, such as the disclosure regime, risk assessments and annual fining requirements. The £100 million limit does not mean that we are giving up on avoidance activity below that level. The other measures at our disposal that I have mentioned can target other types of avoidance activity as well, but the new requirement will complement existing measures that are compliant with how businesses work these days and provide the necessary information to monitor the potential substantial avoidance activity.
Amendment 42 proposes to remove the exclusion for transactions carried out in the ordinary course of trade and those between parties resident in the same territory. We have included those exclusions because, as I have already said, the focus of the schedule is on cross-border restructurings undertaken by multinational groups where the biggest avoidance risks arise. Trading and same-country transactions are relatively low risk and are not the target of the provision. We should not be focusing our avoidance efforts on them, so I think that exclusion is appropriate. The same argument applies to transactions in the same territory, which are, of course, not cross-border and pose a lower risk of avoidance.
The problem with the amendments is that they would result in a very big increase in the administrative burden in return for very little benefit in countering avoidance. We want to focus the rules on large-value, cross-border transactions. Other avoidance measures, particularly the disclosure regime, are available to target other types of avoidance.
I hope I have given the hon. Member for Southport some reassurance. I should add that when we talk about transactions between parties in the same territory, the CFC rules that we debated would tackle the problem of profits being moved offshore to the Cayman Islands in the way that he, perfectly properly, expressed concern about.

John Howell: Will the Minister give way?

Stephen Timms: I will just respond to the point made by the hon. Member for Northampton, South regarding the penalty. A monetary penalty to up to £300 would apply for the initial sum and up to £60 per day thereafter for each day that the report is late. That is in line with the wider penalty regime currently applicable. We have done a lot of thinking about where the penalties from different parts of the tax system should be applied and the level at which they should be applied, and that is a value that is consistent with the wider arrangements. Of course, the penalty attached to the Treasury consent rules was, in theory at least, imprisonment. However, as I said earlier, in 58 years that has never been used. So I think that this is going to be an effective measure. It is going to be simpler to operate and will provide the information that we need.

Brian Binley: One assumes that a fine is a deterrent: the whole concept of fining someone for not doing something is to ensure that they do what you wish them to do. I need to understand how much of a deterrent a fine of £300 will be to international financiers, because I do not get it. Perhaps the Minister could explain how that will act as a deterrent to stop someone failing to report what the Government want them to report.

Stephen Timms: That is an obligation in law with which companies must comply. The hon. Gentleman will know that the various reporting obligations we have imposed  to tackle avoidance have been effective and, I am glad to say, people have complied with the rules. Of course, there is a pretty big incentive for the kind of companies we are talking about to comply with rules clearly set out in statute, not least because of the embarrassment for major organisations when they do not comply with rules of that kind. He will know that we propose to name and shame in some circumstances where tax is underpaid. That will be a powerful incentive not only for individuals, but for companies.
If someone avoids tax, they are at risk of a tax-geared penalty for tax not paid as a result of the underlying transaction, and that can be up to 100 per cent. of the tax avoided. With regard to the level of £300, it is appropriate that that penalty should be consistent with the rest of the penalty system that is in place. I would not want the hon. Gentleman to think, however, that that is the only downside of not meeting the obligation being imposed.

John Pugh: I thank the Minister for that thoughtful response. I totally accept that we have to move away from a consent system to a reporting system in an age when millions of pounds can be transacted at the touch of a computer button. I also accept that modern business needs a different system and agree with him that it needs to be a robust and stringent system that ensures that everyone pays due tax and that, none the less, business functions as efficiently as it can.
As for pathetic nature of the fine, we explored the possibility of tabling an amendment on that. I understand that there are some technical reasons why that might be difficult, but it is still a preposterous penalty. Although we were unable to table an amendment, we might need to take another look at what we can do to beef up the penalties for people who flagrantly disregard the legislation as the Minister wishes it to work. I do not think he really responded to my point that the reporting regime is lax, and nor did he really respond to my point that in paragraph 9 we are not so much closing loopholes as drilling more. We will have to revisit that topic on Report.
The Minister has made some interesting points that are pertinent to my amendments. He discussed how HMRC is best to conduct itself when investigating tax avoidance and what is the most efficient use of the Revenue. That is certainly an issue that has cropped up in the Public Accounts Committee. I am aware that HMRC wants to target those areas where it will get the best results, although it remains the case that tax avoidance, at any level, should be prevented, and big companies should certainly be prevented from parcelling up their businesses into smaller units to avoid the reporting restrictions.
Underlying that is the other question of how business and the taxation system can best exist in the modern world, and the Minister, reasonably, is trying to suggest that he has the recipe right, but I am not completely convinced. He has pointed out that some of the evils to which I am drawing attention and that appear to be omitted by schedule 17 are addressed in some way and in other parts of Bill. I will have to go away and investigate that and consider whether that claim is fairly or adequately made. For the moment, however, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment 161, in schedule 17, page 190, line 10, at end insert or.

Peter Atkinson: With this it will be convenient to discuss the following: amendment 160, in schedule 17, page 190, line 12, leave out from partnership to end of line 14.
Amendment 162, in schedule 17, page 190, line 33, leave out a and insert an event or.
Amendment 163, in schedule 17, page 191, line 38, at end insert
debenture does not include a guarantee;
transfer does not include a transfer by way of security..
Amendment 164, in schedule 17, page 192, line 9, at end insert
or six months after the regulations referred to in paragraph 4(2) are made, whichever is the later.
Amendment 165, in schedule 17, page 192, line 10, after Schedule, insert
(with exception of those made under paragraph 8(2)(e)).

Mark Hoban: These are relatively small amendments, so I will not spend a huge amount of time talking about them. The objective of the group of amendments is to try to tighten the rules for reporting transactions and to be clear about the circumstances in which transactions will be reported.
Amendment 161 would simply insert the word or between sub-paragraph (2)(c) and (d) in paragraph 8 on page 190. Sub-paragraph (2)(c) and (d) refer to a transfer of an economic interest. It would be one type of transfer or another, rather than (c) and (d) applying sequentially.
Amendment 160 would create some certainty that commissioners will not seek to expand the event or transaction set out in paragraph 8(2)(a) to (d) unless they do so through primary legislation. This is a probing amendment. I am interested in understanding a bit more from the Minister as to why he feels that the power in sub-paragraph (2)(e) is necessary.
Amendment 162 is a drafting amendment. Paragraph 4(2) refers to an event or transaction, whereas paragraph 9 on page 190 refers to a transaction. Should it refer to an event or transaction? This is very much a drafting amendment.
Amendment 163 would provide some clarity that there is no obligation to report the creation of a legal or equitable mortgage over the shares of a foreign subsidiary or the giving of a guarantee to a foreign subsidiary. If they were specifically excluded, it might reduce the number of transactions that could be reported. The Minister may suggest that such an exemption might give rise to some tax-paying opportunities. I would like to hear his thoughts on the matter.
Amendments 164 and 165 relate to the transitional provision in paragraph 14. I would like to hear from the Minister how he expects it to work in practice. On amendment 164, the problem is that companies have six months from the day on which transactions took place to report them. Regulations may be introduced that lead to that reporting period being eroded. It may be less than six monthsin effect, a kind of technical retrospection. I am not sure whether that is the Governments intention in paragraph 14(1).
Amendment 165 seeks to tighten up reporting on the transition, again in respect of regulations that are made under the schedule. In part, these are probing amendments, to see if we can focus on the schedule to try to reduce the volume of transactions that can be reported and to ensure that companies are not caught out having to report transactions in less than a six-month period because of regulations that may be made.

Stephen Timms: I shall be brief. Amendments 160 to 162 concern the regulation-making powers in the schedule. The first two would remove HMRCs power to widen the scope of the reporting requirement in the light of commercial or legal developments. The new post-transaction reporting requirement is targeted at areas that pose a significant risk of tax avoidance in order to ensure that HMRC receives the information that it needs to deal with tax avoidance, but amendments 160 and 161 would remove the ability to ensure that those provisions track commercial or legal changes. That could give rise to new tax avoidance opportunities and undermine the purpose of the requirement. We want to be sure that the schedule can target areas of significant avoidance risk, and that it can be used for future avoidance opportunities as they arise.
Amendment 162 would give HMRC additional powers to narrow the scope of the reporting requirement by extending the excluding power in paragraph 9 to cover events as well as transactions, but the only event reportable under schedule 17 is a foreign subsidiary entering into a partnership. For the provision to be effective, HMRC would first have to introduce new reportable events using the regulatory power in paragraph 8(2)(e). In effect, the amendment would give a circular result, which makes it unnecessary.
Amendment 163 seeks to insert two additional definitions in the schedule that would exclude guarantees and transfers by way of security from the reporting transactions. The schedule already contains exclusions for giving securities to financial institutions, including guarantees and transfers of securities in that context, so the additional definitions are not necessary.
As the hon. Member for Fareham explained, amendments 164 and 165 are about the transitional provisions in paragraph 14 of schedule 17. Amendment 164 would ensure that companies have at least six months to make a report under the new rules in the event that regulations are not in force by 1 July. I reassure the hon. Gentleman that the amendment is not necessary. The regulations have been drafted and were sent to the House last Thursday, after the amendment was tabled. We can therefore be confident that the regulations will come into force on 1 July, when the schedules provisions commence. The transitional provision also allows for regulations made under the schedule within one year of the Bills enactment to have effect from 1 July 2009. Amendment 165 would prevent that from applying to additional categories of reportable transactions specified by the regulations. However, it is appropriate for the transitional provision to apply evenly to all the regulation-making powers in the event that a new avoidance opportunity was detected by HMRC in the next year, which is quite possible.
How will the retrospection interact with the deadlines for reports if HMRC included a new reportable transaction? We would be happy to abide by the six-month time limit. For example, if the regulations were amended on 1 June 2010 to include a new reportable transaction, it would apply only to transactions undertaken after 1 December 2009. That might be of some reassurance. In practice, I would not expect new reportable transactions to be added in the next 12 months, but we need to be sure that we can address tax avoidance and protect the Exchequer if the need arises.

Mark Hoban: I am grateful to the Minister for his comments on the various amendments. He has made a reasonable case for me not to press the amendment to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 17 agreed to.

Clause 38 ordered to stand part of the Bill.

Schedule 18 agreed to.

Clause 39

Certain distributions of offshore funds taxed as interest

Mark Hoban: I beg to move amendment 171, in clause 39, page 19, line 14, at end insert
and accordingly section 397A shall not apply in respect of such dividend.

Peter Atkinson: With this it will be convenient to discuss the following: amendment 174, in clause 39, page 19, leave out lines 15 to 18 and insert
(3) For the purposes of this section and subject to subsections (3A) and (3B) below, an offshore fund satisfies the qualifying investments test if, on the last day of each quarter of the offshore funds relevant period of account, the market value of the funds qualifying investments does not exceed 60% of the market value of all of the assets of the fund (excluding cash awaiting investment).
(3A) The offshore fund shall not satisfy the qualifying investments test if it makes any arrangements with regard to its investments where the purpose of such arrangements is wholly or mainly to satisfy the qualifying investments test on such relevant quarter date and where, having regard to the offshore funds overall investment strategy, the offshore fund would have been unlikely to satisfy the qualifying investments test had the test been applied on any other date.
(3B) Where any of the investments held by the offshore fund are qualifying holdings (as defined in section 495 of the CTA 2009), such qualifying holding shall not constitute a qualifying investment if the company, scheme or fund which might otherwise constitute the qualifying holding has, for the 12 month period preceding the date that the dividend is paid, provided written confirmation on a quarterly basis to the offshore fund that its investment strategy is to invest in assets which the company, scheme or fund anticipates will meet the qualifying investments test and it is not aware that this strategy has been breached..
Amendment 175, in clause 39, page 19, line 23, leave out from means to end of line 31 and insert
the accounting period ending prior to payment of the dividend..
Government amendment 89.
Amendment 172, in schedule 19, page 200, line 28, after (6), insert , section 378A.

Mark Hoban: I will give some background before dealing with the individual amendments. Clause 39 deals with a technical aspect of the rules and is meant to tackle the issue that certain distributions from offshore funds are economically similar to payments of interest. It is intended to ensure that distributions of that type are taxed as if they are payments of interest.
The issue arises because of the differential in the tax rates for UK residents and domiciled individuals between dividends, which are taxed at 32.5 per cent., and other forms of income, which are taxed at 40 per cent. Until now, offshore funds, particularly those formed as corporates, were able to pay out a dividend to UK investors that would be taxed at 32.5 per cent. That was the case even when the offshore fund was invested primarily in debt assets that in substance paid out an interest return. In contrast, UK funds are required to distinguish between dividend distributions and interest distributions, with interest distributions being taxed at 40 per cent.
Clause 39 seeks to address that disparity by introducing a bond fund test for offshore funds. Individual UK investors will be required to distinguish between distributions received from bond funds and from non-bond funds for any distributions paid on or after 22 April 2009. The bond fund test is derived from the test that UK corporates are required to apply to their investments. Broadly, an offshore fund that at any point during an accounting period has more than 60 per cent. of its assets invested in interest-bearing securities will be deemed a bond fund. The impact of that is that any decision made by a bond fund in relation to the profits of that period will be deemed an interest distribution. That will help the UK investment management industry by reducing the disparities in the taxation of distributions from onshore and offshore funds.
Budget notes 21 and 22, which underpin this measure, state that the intentions behind these changes are to enable individuals with holdings of 10 per cent. or more in non-UK resident companies to become entitled to a non-payable tax credit on dividends from such holdings, and to restore the non-payable dividend tax credit for offshore funds that are largely invested in equities, subject to certain conditions. However, as the clause is drafted, it is not clear whether the tax credit is available in respect of a distribution from an offshore fund that fails to meet a non-qualifying investments test where a distribution is made to a minority shareholder in an offshore fund with authorised share capitalthat is condition Aor an offshore fund in a qualifying territorythat is condition C. Amendment 171 would make clear the application of that.
Amendment 174 addresses the problem that requirements to measure whether an offshore fund fails to meet the qualifying investments test at any time during an accounting period are over-burdensome. It is likely to prove impossible for funds to comply with those requirements in practice. It is the at any time point that I am trying to address with the amendment. It is quite a lengthy amendment because it would introduce new subsections (3), (3A) and (3B) to try to make the process smoother.
New section 378A will introduce to the Income Tax (Trading and Other Income) Act 2005 a tax credit for dividends paid by offshore funds. However, as I said, the tax rate is not available if the offshore fund fails the qualifying investments test at any time during the accounting period. If the test is failed, the dividend will be taxed at the income tax rates applicable to interest. As I said earlier, the offshore fund will fail the qualifying assets test if, at any time during its accounting period, the market value of the qualifying investments exceeds 60 per cent. of the market value of all its investments.
Qualifying investments means interest-bearing instruments and instruments such as derivatives that relate to the performance of interest-bearing investments. The definition of qualifying investment also includes interest on funds that could fail the qualifying investments test. When paying a dividend, an offshore fund will need to let its shareholders know whether the test has been failed so that it can file proper tax returns and pay the appropriate rate of tax.
An offshore fund may hold a complex, extensive and constantly changing portfolio of assets. To ensure that the qualified investment test is met at any time, the fund will have to ascertain daily the market value of each underlying asset, which is over-burdensome. For a fund of funds, such a level of monitoring would prove impossible. It will not have the information on the underlying funds.
A similar test exists in relation to offshore funds held by UK companies. In practice, that may be invoked relatively infrequently, because a UK company is not a common vehicle through which investments in offshore funds are made. Extending a test to apply to all shareholders in an offshore fund will require many more funds to operate those requirements. The amendment would impose a workable monitoring requirement that remains sufficiently rigorous to leave little or no scope for abuse.
Amendment 175 asks whether a requirement to measure whether an offshore fund fails to meet the qualifying investments test during a relevant accounting period is over-complicated. In this case, the problem stems from the definition of a relevant period of accounting, which is either the accounting period ending prior to the payment of the dividend if there are undistributed profits available to that period or, otherwise, the accounting period in which the dividend is paid. That is quite a complex definition because it will require significant record keeping on the part of the offshore fund. It may result, in relation to the second limb of the test, in a mismatch between the data on which the fund is able to inform its shareholder that the qualifying test has been met or failed, and the data on which an investor must file a tax return.
To use 2009 as an example, if a fund had a calendar-based accounting period and paid a dividend in January 2009, it will not know until some time after 31 December 2009 whether the qualifying investments test was met for the period. However, the dividend must be included in the tax return for the year ending 5 April 2009. That could give rise to a situation in which a fund is not given enough time in which to carry out its calculations and report to investors before the tax return is due.
Amendment 175 would alter the Bill so that an offshore fund could measure whether it has satisfied the qualifying investment test by reference to its investment strategy in the accounting period immediately prior to the payment of the dividend. We are trying, with the amendments, to simplify things for investors in the funds while maintaining the spirit and purpose of the clause.

Ian Pearson: Briefly, by way of background, during the process of extending the dividend tax credit to portfolio investments last year, it became apparent that some funds were seeking to exploit the measure by locating their cash or bond fund ranges offshore to gain a tax advantage for their UK investors. The Government amended last years Bill to prevent investors in offshore funds from receiving the dividend tax credit and said that we would continue to examine the issue in the context of reform of personal dividend taxation and modernisation of the offshore funds regime.
Following further work, the Government are making further changes to the treatment of distributions from offshore funds as part of the personal dividends tax reform package. Clause 39 addresses distributions made by offshore funds when more than 60 per cent. is invested in interest-bearing assets. Distributed income from such funds will be taxed at the same rate as income from interest-bearing assets held directly, and income from interest-bearing assets held through a UK fund.
I will respond to the group of amendments to which the hon. Gentleman spoke in a few moments. Government amendment 89 has been tabled to ensure that clause 39 operates as intended. That does not represent a change in Government policy. However, after the Bill was published last month, technical questions were raised about whether the clause fully achieved its purpose.
Amendment 89 is to ensure that dividends received from an offshore fund that holds more than 60 per cent. of its assets in interest-bearing assets, are taxed as interests and not as dividends which would be eligible for the dividend tax credit. Specifically, doubt was raised as to whether the charged tax as interest took priority over the charged tax as a dividend, and whether the tax credit had been disapplied. The amendment puts the matter beyond doubt. It introduces a technical, consequential subsection to a section that determines the priority of various taxing provisions, and ensures that the clause operates as intended.
We recognise that the amendments tabled by the hon. Gentleman seek to address potential ambiguities in the current text of the clause. In relation to amendment 171, the Government agree that the dividend tax credit should not be available to income from offshore funds that are mainly invested in interest-bearing assets. In practice, however, the Government believe that the amendment required is a little broader, ensuring that the treatment of dividends paid by the funds as interest for tax purposes must displace any treatment as a dividend that would otherwise apply. That is achieved by the Governments amendment, as I have explained.
I also welcome the hon. Gentlemans attempt to clarify the legislation in schedule 19, with the signposting suggested in amendment 172. However, that amendment is unnecessary, we believe, because Government amendment 89 should provide the clarity that it seeks to effect.
Amendment 174 seeks to dilute the test for offshore funds not being treated as paying interest to UK investors. However, the amendment would mean that the test, in relation to qualifying investments for investors liable to income tax, would be out of line with the test applying to corporate investors in both offshore and onshore funds. That would add to complexity, rather than reduce it. The Government are willing to consider changes that would be beneficial, but any change must be consistent and we do not believe that that change is. We would be happy to receive representations on how the test could be further improved, provided that the improvements would apply the principles equally to individual and corporate holders, as well as onshore and offshore holdings. Those that follow these deliberations closely will, I am sure, want to make representations to us on the matter.
Although amendment 175 attempts to simplify subsection (5), we do not believe that it works. If accepted, the amendment would mean that an interim dividend paid out of current period income would have to be related to an earlier period of account even though the income distributed arose in the current period. That makes the targeting of the legislation ineffective.
With regard to amendment 174, the hon. Gentleman raised a point about the any time requirement, saying that it was too strict. The requirement is built in to ensure that funds cannot spend some or most of the relevant period invested in interest-bearing assets, and then exploit the rules for their investors by switching their investments. It is closely modelled on the existing test applying to corporate investors in a fund, whether onshore or offshore, so we do not believe that it will present any difficulty.
The hon. Gentleman raised the point that a fund would not know until after 31 December 2009 whether it applied, but that the information would need to be in the tax return and there was not enough time to check. Tax returns for individuals for the tax year 2009-10 do not have to be submitted until 31 January 2011, if they are sent online, so there is sufficient time for investors to get the right amount on their tax returns.
The hon. Gentleman suggested that the test for onshore might be unworkable. The onshore test is slightly different, but it does have an at any time provision, which we believe will work well. Funds generally value their investments on a regular basis, so that investors know the value of their investments. Therefore, I do not believe that there is any additional significant administrative burden as a result of the measures that we are introducing.

Mark Hoban: The Minister makes an important point about the regular valuation of funds. Clearly, any investor wishing to sell their holding in a fund would look for a valuation at the point of sale. Let us say that a fund is valued on a weekly basis for the purpose of enabling investors to sell their holding or to acquire further units in a fund. So long as it was measured at the point at which there was a valuation, would that be sufficiently often to cover the at any time basis? There may be funds that are valued on a daily basis, a weekly basis or a monthly basis. I imagine that so long as the fund was in compliance at the date at which it did its valuation for normal commercial practice, that would satisfy the at any time point.

Ian Pearson: My understanding is that that is indeed the case. However, if I have any further information, I will be happy to supply it. I hope that I have explained why the hon. Gentlemans amendments, although well intentioned, are not required. I am happy to confirm that the answer to his question is yes, so my officials advise me, unless evidence showed that that did not reflect the truth. I therefore urge the hon. Gentleman to withdraw the amendment.

Mark Hoban: That was a helpful explanation from the Minister about the flaws in the drafting of my amendments. It is important that there is consistency between corporate and personal investors where possible and between on and offshore funds. He has reassured me that the at any time issue, which came out quite strongly in the representations that we received, is not insurmountable so long as valuations take place on a regular basis, and clearly investors will drive the frequency of valuation for their own purposes. With those reassurances, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made:89, in clause 39, page 19, line 43, at end insert
(3A) Accordingly, in section 367 of ITTOIA 2005 (priority between Chapters within Part 4), in subsection (3)
(a) in paragraph (a), after dividends) insert , 378A (offshore fund distributions), and
(b) in paragraph (b), insert at the end or Chapter 4 (or both)..(Ian Pearson.)

Clause 39, as amended, ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned.(Mr. Blizzard.)

Adjourned till Thursday 11 June at Nine oclock.